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Wednesday, 15 August 2007

What the Post Editor forgot to mention....

I have watched with some interest the on-going momentum for deeper regional integration. Indeed some are even calling for monetary unions down the line. The Post Newspaper is the latest to voice its opinion on the matter with these open and closing lines in today's editorial:

There is no alternative to regional integration. And any politician who doesn't realise the importance of regional integration is not fit to be called a politician or indeed to be in politics. Regions of the world are integrating at a very fast pace.

Even the most economically powerful countries are seeking one form of regional integration or another. The United States is busy trying to get some Latin American countries in some form of regional integration with it. Europe is continuing to expand its union while the Asian countries are also getting closer to each other.

…. Let the Lusaka SADC summit be a turning point in our regional integration; let's move into a much higher gear of regional integration. There's nothing to fear about regional integration because there will be no losers - all will be winners. Let us not take half-hearted measures; let's go all out for regional integration of our region.
It’s not surprising that people tend to see enormous benefits in deep integration. For a number of years the politically correct solution to fighting poverty has always been deeper regional integration. What surprises me is the how unbalanced the debate seems to be, and how one sided this issue is being portrayed to the Zambian people. (It also surprises me that opinion leaders keep suffering from Sakism). Let us be clear on one thing: the Post editorial assertion that "all will be winners" is a naive and misleading statement. Deeper regional integration does not always lead to benefits for everyone in the region. In fact it can be quite harmful for others or to be more precise it could deliver less economic growth for Zambians than would be the case without, say, a SADC free trade area. There are plenty of examples from around the world that show that there are 'winners and losers'. So it is quite understandable that those knowledgeable in these areas have tended to be careful how they integrate.

The reason is actually very simple. When you combine a number of poor, slow-growing individual economies, you have a poor, slowing growing regional economy. Trade is really generated by differences and the big opportunity for nations in the SADC region is to trade with richer countries, by harnessing the advantage of our cheap labour. Within a group of poor countries that are in the SADC region there simply not sufficient differences to generate much trade that the Post editorial seems to imagine. Worse, the differences that do exist between SADC countries will get reinforced rather than reduce.

What is even more unfortunate is that the Post Editor has chosen the EU as an example. It's deeply misleading . Why is the EU example misleading? Well we know that Portugal and Ireland have benefited greatly from deeper EU integration. These nations appear to be catching up with the richer ones like France and Germany. Free trade in Europe has been equalising and will continue to be with greater enlargement. However, such cannot be expected for poorer nations.
Tony Venable's paper on "Winners and Losers from RTAs" provides the reason why. It appears that while regional trade integration among richer countries leads to convergence, trade integration among poorer nations leads to divergence. The reason for this is that regional schemes, whether between rich countries or poor countries, benefit those member countries that have characteristics closest to the global average. In a rich-country club, the member closest to the global average is the poorest member; in a poor-country club, the member closest to the global average is the richest. So in the rich-country clubs the poorest member gains (convergence) while in the poor country clubs the richest member gains (divergence).

A quick illustration of what happens when poor countries group together. Suppose Zambia and South Africa went into deeper integration via SADC. The comparative advantage of South Africa relative to Zambia leads South Africa to export more skilled labour intensive goods (say manufactures) to Zambia, which in return exports more unskilled labour intensive goods(agriculture).

The first of these flows is trade diverting: Zambia is getting manufactures from South Africa rather than the rest of world in line with "comparative advantage" within the new SADC free trade area rather than global comparative advantage (say it previous got Chinese goods). But the second flow is trade creating : by increasing agricultural imports from Zambia, South Africa is trading with the lowest cost supplier in the world, not just within the SADC region. South Africa gets a better deal than Zambia does leading to deeper divergence. What all of a sudden look like a good idea…does not appear so good.

So faced with these possibilities, what is a reasonable and more cautious way to proceed? I think for a nation like Zambia, the best way is find areas where most progress can be made without generating negative distributional effects. I was deeply encouraged when I read President Mwanawasa's priorities for integration as quoted in the
Daily Mail:
In our quest to consolidate this unity through infrastructure development, we must exploit all opportunities and seek new ones". Mr Mwanawasa said.

He said air transport facilities, road and telecommunication networks should all be developed further to enhance development.
The agenda therefore should be focused on infrastructure. This is the integration SADC nations need at this stage of our growth not deeper free trading of the poor nations with weak governance structures that will only benefit the likes of South Africa and Botswana which are closer to the the 'global average'. Its time to have a proper and well informed debate on what level of integration is good for Zambia, and simply not assume as the Post editorial suggests, that all integration is good integration. Except this time, I find myself pleading that the President lead the debate rather than the media.

33 comments:

  1. Cho,

    As tempting as the SADC may seem in the current local context, especially given the questionable economic and political continuity of COMESA membership, the model you present would tend to indicate that the best available international partners would be the Commonwealth nations. A stronger Commonwealth which, with all due respect to Her August Majesty, Queen Elizabeth II, is reconstituted as a more representative body without undue preference given to Great Britain, would bring to bear economic resources equal to any existing international body in the world.

    Rather than relying on the relative inertia of just the South African economy to place appropriate value on the development of Zambian infrastructure, a true union of democratic Commonwealth economies would also include nations such as Canada, Australia, India, Nigeria, and Kenya, even such crucial neighbors as Mozambique, and perhaps equally crucially excluding Zimbabwe at the moment.

    If the route to sustainable development lies in alliance with partners who are sufficiently rich to avoid "comparative advantage" from outweighing the disadvantages, then so be it. South Africa and Britain are far from the only relatively wealthy nations which Zambia is in formal association with. The anglophone member states of the Commonwealth have a presence on all continents and include nearly 2 billion people. Shared english can be a passport to 1/3 of the world economy, especially in IT applications, as India and Ireland have recently taken full advantage of. India, which excels in provision of business services rather than manufacturing, seems a more advantageous partner for developing the Zambian manufacturing base over the near term than China, which is being asked to, in effect, develop its own future competition.

    I don't really know Australians, and I have heard some unfavorable things about some of their projects on the continent in the past, fair enough. I do however know many Canadians, have traveled and worked there, and as a nation, you couldn't ask for better neighbors or development partners. For members of a high-end consumer culture, they take the concept of global responsibility seriously, just have a look at the per capita contribution to UN blue helmet deployments. If countries like Canada and India are treaty-bound to bring Zambia along with them as they develop for the coming century, I will feel a lot better about the prospects than the package that SADC seems able to offer.

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  2. Yakima,

    I totally agree.
    A combination of more regional cooperation on infrastructure (especially air and rail travel, access to ports and energy) and bilateral deals with richer partners or even as you say a commonwealth based union would be far better than what is being proposed.

    I am encouraged though that not all regional ministers are following the bandwagon. The Zimbabwean Minister Mumbengegwi's comments where very positive (although his motive is suspect - the Zimbabweans oscillate between support and oppose depending on the international pressure on Mugabe - they broadly favour comradiship over interferenc). Here is the quote from Yesterday's post:

    But Zimbabwe's Mumbengegwi urged caution in the way the SADC free trade area should be handled and implemented because countries in SADC were not as rich as the European Union.

    Mumbengegwi said if SADC was not careful, it would become a dumping ground for goods. He said the terms might be so low that they attract more imports. He said the customs union could not benefit SADC states as a whole. "We should not be excited about the concept," said Mumbengegwi.


    The key I think to the debate is the level of the common external tariff.

    This is a bind. if the tariff is medium to high - South Africa, Bots, Namibia and others gain...

    If it is too low - then the fear of the Zimbabwean Minister comes to reality....

    My concern is that this type of debate is not taking place in the media. The hope therefore is that Levy will lead the dicussions - there was further reason for optimism yesterday, according to media reports:

    "We therefore have to focus on those infrastructure programmes and projects that facilitate quick and efficient linkages in our communication systems.

    "This requires prioritising the development of the regional trunk road network, strategic air transport facilities and the most effective telecommunication network that will enhance intra-regional travel and communication," he explained.

    The consolidation of the FTA, he said remained elusive partly due to the inherent production structures, which he said had remained by and large unfavourable, and the continued existence of intra-regional trade barriers between member states.


    http://allafrica.com/stories/200708160796.html

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  3. I agree with Cho and Yakima that the Commonwealth would be a better trade grouping than SADC because with FTAs bigger is better. But we really need to remove ALL barriers to trade. The rationale for this was well expressed by The Economist on 4 Dec 1999 in an article from which I quote.

    'In economic logic, the case for free trade is the case for unlimited free trade. If you can lower trade barriers, the main benefits flow not to your trading partners, but to you. It is your consumers who get access to cheaper and better products, and your producers that are forced, through competition, to become more productive and technologically advanced. In economic logic, that is, lowering trade barriers makes sense in much the same way that building a network of highways makes sense. And refusing to lower your own trade barriers unless your trading partners reciprocate by lowering theirs is just as senseless as refusing to invest in roads, education and other public infrastructure until other countries promise to do the same.'

    Hong Kong has not suffered from adopting unilateral free trade. Nor would Zambia. Protecting inefficiency does not stimulate development.

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  4. and your producers that are forced, through competition, to become more productive and technologically advanced.

    And this is where their hypothesis on free trade goes wrong.

    They presume that the only thing limiting international competition is trade barriers.

    What they don't mention (and coming from The Economist, they should know better), is that many of the West's goods are massively subsidized by the Western taxpayer. So when someone in Arizona grows a cucumber for 100 cents, and gets 80 cents worth of US taxpayer money in the form of agricultural subsidies, such a farmer can sell his cucumber for 20 cents and break even, even though the true costs is 100 cents. Such a farmer can then still ship his cucumbers half way around the world, and still make a profit while offering a lower price than a local producer.

    In other words, getting rid of international trade barriers has again and again destroyed local economies, and not because they are less efficient.

    Also, they don't acknowledge that there are other constraints on economic participation, such as patters of land ownership, historic disenfranchisement, and absence of infrastructure of all kinds, among others.

    And refusing to lower your own trade barriers unless your trading partners reciprocate by lowering theirs is just as senseless as refusing to invest in roads, education and other public infrastructure until other countries promise to do the same.'

    Actually I disagree with these. Unilaterally throwing open your borders is pretty disastrous, and (just stepping outside of the realm of economics), if you rule over a democracy, the voters will show you the door if the economic hardships become unbearable. This is what you see all over South America - the rejection of IMF/World Bank policy prescriptions, through a return to leftwing governments.

    Then, there is the pesky little fact that economies in Asia that did develop, did so by closing down potential any foreign competition to their own economic bases. For instance, Japan makes it very difficult for a non-Japanese company to set up a manufacturing plant in the country. There is massive paperwork, you have to take on a Japanese partner, etc. On the other hand, if you want to set up a company to help them export Japanese goods abroad, they welcome you with open arms.

    That is not unilaterally throwing open the borders to western goods. That is protecting their own manufacturers from foreign competition - the exact opposite.

    India doesn't allow any chainstores at all (Indian or foreign), and in sensitive areas like atomic energy, they don't allow foreign businesses to have anything to do with them.

    Hong Kong has not suffered from adopting unilateral free trade. Nor would Zambia. Protecting inefficiency does not stimulate development.

    Hong Kong (or Singapore) are not Zambia. They are city states, who have no natural resources, and as a result, have to import much of what they need no matter what happens.

    Then, they are cities, which means they don't have thousands of kilometers of roads and other infrastructure missing they need to develop.

    And lastly, because of the small distances involved, they can focus on technology, hitech and college graduates to start and attract manufacturing businesses, and other high information, low resources based businesses (finance, software, consulting and the like).

    Now if you'd compare Hong Kong and Lusaka, or Hong Kong and Ndola, that would be different.

    But Zambia has a whole different set of needs and possibilities than Hong Kong does. One of it is mine ownership, the other would be the 80% of arable land that is not under cultivation, and Zambia's ownership of 10% of Africa's fresh water resources.

    Also, it would be more productive to compare Zambia to Japan or India, instead of Hong Kong or Singapore.

    Different countries, different economies. Different policies are required.

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  5. Murray,

    "And refusing to lower your own trade barriers unless your trading partners reciprocate by lowering theirs is just as senseless as refusing to invest in roads, education and other public infrastructure until other countries promise to do the same"

    The Economist Magazine quote is interesting. But probably ignores other types of "barriers", that are often mentioned by the likes of Dani Rodrik.

    Even if we had zero barriers to trade there would still be a case for some protectionism.

    The problem is that some barriers emanate from political and legal jurisdictions, which means that there remain plenty of transaction costs which block economic convergence. Capital flows are hindered by sovereign risk and the absence of international regulation and lender-of-last resort functions, which create some unfavorable syndromes.

    Labour mobility across states is severely restricted. And differences in regulatory regimes impose severe transaction costs (estimated by Jim Anderson and Eric van Wincoop to be of the order of 40% in tariff equivalents) on international trade. In the presence of these transaction costs, free trade in goods (in the sense of zero import tariffs) is in general incapable of achieving rapid economic growth and economic convergence in poorer nations of the world.

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  6. In the presence of these transaction costs, free trade in goods (in the sense of zero import tariffs) is in general incapable of achieving rapid economic growth and economic convergence in poorer nations of the world.

    Which is why it is so important to take away internal economic barriers first.

    The government is in an excellent position to take away legislation that is hindering trade, as well as enact legislation that will stimulate it.

    Security of tenure of land (within the confines of proper use and not speculation) is something the government can look at.

    Also, prioritising infrastructure that will connect several parts of the country, and then using that to develop and link up local infrastructure.

    Regionally, through SADC, they are looking at regional infrastructure, which is great.

    Education wise, there should be universal access to education, and there should be a lot more technical and vocational training (combined with courses in business and entrepreneurship), to create a whole range of skilled professionals that an expanding economy would need.

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  7. My argument - or rather The Economist's - for free trade certainly provoked a lively response. But there was complete silence about the consumer, whose interests are always neglected. Consumers as a class are neither informed nor organized, so they have no voice against powerful producer lobbies.

    We continue to ignore Adam Smith's dictum: "Consumption is the sole end and purpose of all production; and the interest of the producer
    ought to be attended to only so far as it may be necessary fro
    promoting that of the consumer".

    The fact that the US and the EU subsidize their farmers does not make this a sensible thing to do, and we should not copy them by making our consumers pay unnecessarially high prices. Instead let's recognize that the world's most prosperous countries are the ones with the lowest trade barriers.

    Zimbabwe used to be the 'bread basket' of Central and Southern Africa. Nothing prevents Zambia from achieving that position. We need to abandon victimhood and start acting positively. I agree it would not be easy, but we need a new mindset.

    Best wishes from an admirer of New Zambia,

    Murray

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  8. ”But there was complete silence about the consumer, whose interests are always neglected. Consumers as a class are neither informed nor organized, so they have no voice against powerful producer lobbies.” - Murray

    I’ll leave to MrK to present his “defence”, but from my perspective I think both sets of arguments are looking after consumers. In fact that is the real question – does free trade deliver economic growth?

    The text book answer is that it does deliver incredible welfare gains for everyone. But in the text book there’s perfect information. No political boundaries. The legal framework is the same across, there perfect labour mobility, etc.

    The question therefore becomes - if we added imperfect information, legal restrictions, political boundaries, labour immobility, and so forth, will free trade deliver economic growth for the poor consumers? We are operating in a second best world and here, the answer is unclear.

    In this second best world, eliminating tariffs is insufficient because there other barriers to trade.

    The case for protection comes out of the realisation, that in face of these barriers, nations need to look after their own interests. Yes lower tariffs reduces prices facing consumers, but if that leads to zero producers of maize, without an equivalent increase in producers in another area because of the other barriers I have mentioned, is it desirable?

    The other point of course is that in terms of “economic security” and looking after the interests of consumers of tomorrow, there are may be sectors that are critical. Food production is certainly one of those sectors that you must produce a minimum. You can’t rely on foreign states to be your food providers. Today consumers may get cheaper food because you imported it, what happens if the people supplied your food withdraw the supply tomorrow?

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  9. Murray,

    Instead let's recognize that the world's most prosperous countries are the ones with the lowest trade barriers.

    Japan, Korea, India have huge international trade barriers though.

    Also, Germany is part of the EU, which supports it's farmers with huge farm subsidies, as does the US.

    So in theory, all things remaining equal, free trade would be a good thing. In practice, all things are not equal, and there is massive interference in markets, even when national barriers would come down today.

    We would be much better off in studying how economies have been built historically, than to adhere to the unproven theory of neoliberalism.

    The fact that the US and the EU subsidize their farmers does not make this a sensible thing to do, and we should not copy them by making our consumers pay unnecessarially high prices.

    First of all Zambia does not have the money to copy them. However, those subsidies make it impossible for local producers to compete with their products - not because they are less efficient, but because of the competition falsifying effect.

    There is a remedy to farm subsidies though - import tariffs. If it costs a farmer in the US 100 cents to produce cucumber, and the American taxpayer hands him 80 cents worth of subsidies so he can sell his product for 20 cents and break even, the Zambian state has every right to charge 80 cents import tariffs and even things out.


    I agree it would not be easy, but we need a new mindset.

    Well Charles Mulipi of the Public Accounts Committee has the right mindset. The old UNIP leadership, although their methods should have been different, had the right mindset.

    Accountability, transparancy, everything is there. All that is needed is to have the right leadership in place.



    Cho,

    I think both sets of arguments are looking after consumers.

    Free trade will hurt those consumers, who derive their income from local production. And I don't mean theoretically, but practically. Free trade destroys local industry, within the context of EU and US (farm) subsidies, and greater development and organisation (how many indigenous owned corporations does Zambia have?).


    In this second best world, eliminating tariffs is insufficient because there other barriers to trade.

    The key to solving Zambia (and Africa's) problems is by focusing on indigenous production, and everything around that - infrastructure, education of the present and future workforce and entrepreneurs, land redistribution, making it easy for businesses to operate legally through lower taxes and less paperwork, borrow money, etc.

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  10. murray.sanderson25 August 2007 at 13:45

    Murray says

    Cho raises concerns about free trade.

    First, does it deliver economic growth? Just look at China, where a policy of free trade has produced an explosion of economic growth. And China is not alone. The world's prosperous countries all have far lower tariffs than 'third world' countries, which 'protect' themselves behind trade barriers.

    Cho says that 'eliminating tariffs is insufficient'. Quite true. Non-tariff barriers need to come down too. This is happening, but far too slowly, due to strong resistence by producer lobbies, which do their best to fight competition, not by improving their ideas, efficiency and technology, but by persuading governments to maintain, and even increase, trade barriers. Resisting foreign competition sounds patriotic, but it harms our consumers, while our producers remain backward, for lack of incentive to improve their performance. Eliminating tariffs is indeed insufficient, but it is a start. Half a loaf is better than no bread.

    Lastly, Cho raises the bogey of food shortages. If we don't produce all the food we need, we shall leave ourselves at the mercy of foreigners, who may later cut off supplies. When did a country last refuse to sell products to
    another? Not since the second world war over 60 years ago.

    It is sad that protectionists still cling to ancient arguments, arguments which were demolished by Adam Smith. If they really believed the food argument they would drop trade barriers for all manufactures, and just retain them on basic foodstuffs. Building a new Zambia will indeed require a new mindset, especially on international trade.

    P.S.in reply to Cho's statement of 24th, "Free trade destroys local industry".This needs qualifying. Free trade does not destroy local industry in China, or anywhere else where it is of a standard and efficiency to compete against foreign imports. It can indeed destroy local industry which is inefficient and uneconomic. Hence the 'infant industry' argument. That is fine, so long as the infants are not coddled for so long that they fail to grow up. Any infant industry protection should be for a specified number of years, without extensions. Otherwise countries are merely subsidizing inefficient businesses, instead of forcing them to grow up and provide efficient and competitive service to consumers.

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  11. Murray,

    ”First, does it deliver economic growth? Just look at China, where a policy of free trade has produced an explosion of economic growth. And China is not alone. The world's prosperous countries all have far lower tariffs than 'third world' countries, which 'protect' themselves behind trade barriers.“

    The Chinese example is precisely the case of a nation using protectionism intelligently, rather than a nation embracing free trade. Dani Rodrik describes the Chinese industrial policy best:

    'First, the [Chinese] government required foreign companies to enter into joint ventures with local enterprises, ensuring the transfer of technological capacities. Second, domestic content requirements compelled vehicle manufacturers to source more of their inputs domestically than they would have chosen to do at the outset. Economists normally think this is a terrible policy because it breeds inefficient domestic suppliers. (Such requirements are also now banned by the WTO). But this has evidently not happened in China (and also in India), where first-tier suppliers have reached near-frontier levels of productivity. John Sutton, who has analyzed the auto industry in China and India in detail, credits in part the domestic content requirements for this achievement. Finally, state-owned enterprises have been a breeding ground for private entrepreneurs'.

    "Resisting foreign competition sounds patriotic, but it harms our consumers, while our producers remain backward, for lack of incentive to improve their performance. Eliminating tariffs is indeed insufficient, but it is a start. Half a loaf is better than no bread."

    I agree with you, that in a pure “partial equilibrium” analysis, the greatest threat to Zambian consumers is not subsidies by foreign states [since these lower the price to Zambian consumers as they buy products on the cheap – with some cost to Zambian producers if they are unable to diversify], but Zambian tariffs [since these hurt consumers in accepting higher prices than would have been the case with trade].

    I do accept that “partial equilibrium” analysis shows that if we interested only in consumers of today, we STILL have a case for lowering tariffs even if western nations kept theirs. My concerns really are not so much about that, but with the "partial equilibrium" assumptions that under the results/logic. For that a reason I am skeptical on whether going for a "half loaf" could generate pervese results.

    I am for genuine free trade, in a genuinely free environment i.e. with common legal restrictions, common lender of last resort and so forth – in other words in a world without political boundaries.

    "If they really believed the food argument they would drop trade barriers for all manufactures, and just retain them on basic foodstuffs. "

    I agree that is probably as far as I would go. I would restrict minimum protection to maize :)

    But I would also probably do more to ensure that where Zambia lowered its barriers, measures are in place to encourage technological transfers and so forth. The good news is that there's already evidence some evidence that FDI does help domestic producers. A recent study by Laura Alfaro and Andrew Charlton is a prime example:

    'We find evidence that entrepreneurial activity in industries which are more reliant on external finance is disproportionately affected by international financial integration, suggesting that foreign capital may improve access to capital either directly or through improved domestic financial intermediation. We also find evidence that FDI may create opportunities for new firms as potential suppliers to the foreign firms. Capital market liberalization is unquestionably a controversial policy. Our results do not comment directly on the welfare issues associated with liberalization policies and are indeed consistent with many of the findings on capital account liberalization and growth. Our conclusion is strongest for direct investment and most robust in rich countries. At a minimum, the use of micro data should enhance our general understanding of the process by which the effects of liberalization are transmitted to the real economy'.

    "Building a new Zambia will indeed require a new mindset, especially on international trade."

    A challenging area for all us.
    It seems to me like most things, how Zambia opens up to trade is the question and not whether it does. That is important because it shows that free trade in general is accepted as a desirable goal, but its how to ensure it syncs in with other societal and economic goals.
    Unfortunately Government has struggled of late to find trade economists!

    "P.S.in reply to Cho's statement of 24th, "Free trade destroys local industry". This needs qualifying. "

    Fortunately for me this is not my statement. Its MrK's.

    My personal view is that this again depends on HOW things are done. As I have said above there's evidence of it working the other way.

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  12. Resisting foreign competition sounds patriotic, but it harms our consumers, while our producers remain backward, for lack of incentive to improve their performance.- Murray

    It is more than patriotic, it is (I think) common sense.

    What I would like to point out is that consumers who are employed, are also producers. If a consumer working at a factory loses his job because the factory closes, the consumer loses his source of income and stops consuming.

    This is why local production has a much bigger total impact on the economy than just lowering the prices paid by the consumer. This is why China is booming - because they are producing, in their case manufacturing, goods not only for themselves, but for the whole world.

    And they keep most of what they make, which is why they have been able to buy so much US treasury bonds, and why they can be so spendthrift with their money in Africa. I wouldn't put it past this collection of politicians to create deals where foreign companies just produce their goods in Zambia and use the people of Zambia as a cheap labour force, while allowing the corporations to keep all the profit, not pay taxes and use foreign suppliers. Like they did with the mines.

    Leaving the rest of us scratching our heads, wondering whether they are cowardly or corrupt.

    Also, in the process of bringing down trade barriers, let's make sure our producers are incentivized, not vaporized. :)

    For the destruction of the Jamaican economy through eliminating trade barriers, see Stephanie Black's documentary Life And Debt.

    Lastly, Cho raises the bogey of food shortages. If we don't produce all the food we need, we shall leave ourselves at the mercy of foreigners, who may later cut off supplies. When did a country last refuse to sell products to another? Not since the second world war over 60 years ago.

    Zimbabwe comes to mind. As does France, when it refused to join in with the war in Iraq. There are plenty of countries that are under embargo, or have been at one time or another.

    However, if you look at the real reason the EU has agricultural subsidies - is because some people still remember the famine they experienced during WWII, or just the general shortages and rationing.

    To them, swapping some taxpayer money for food security is a price worth paying.

    African governments do not stand behind their farmers and an agricultural revolution, and as a result, they need to import food whenever they have shortages. Which is once in a while, even in Zambia. That should never happen. It is better to produce too much food, than to go without.

    And the reason is not import tariffs, but the fact that 80% arable land is not under cultivation, and 3% of arable land is under permanent irrigation.

    The nation's farmers depend on rainfall, even though there are plenty of fresh water sources in the country.

    That's the problem, not lowering food prices through eliminating tariffs.

    The real barriers to economic performance in Zambia are local, and until someone in power deals with them, they will remain the obstacle to economic growth.

    - land distribution so all farmers have 100 hectares
    - mechanisation of agriculture
    - low or no taxes for startup businesses
    - no red tape, but basic national minimal requirements for labour conditions and environmental impact
    - infrastructure, including a national distribution network for farmer's products that reaches into the rural areas.

    The truth is that getting rid of trade barriers will not make it any easier to start a business, or a medium sized farm, nor will it make the state benefit from the mines - which is what the economy is really all about.

    Farmers should be able to get on the internet, find out the market price, and sell their products for that. No middlemen, no marketing boards (except maybe as a buyer of last resort), but a true free market for local producers.

    Also, I would like to see regional economic integration, before globalisation. It would be far more economical (and sustainable) to trade with the surrounding economic countries first, I would say.

    I think the key to understaning production, is that domestic needs should be met first, and surpluses should be exported secondly.

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  13. I have enjoyed reading through the contributions on the subject relating to economic integration, with particular emphasis on the Southern African Development Community (SADC) Summit held recently in Lusaka. Like The Post newspaper and other pro-integration observers, I really believe integration of Africa’s national economies will open up vistas for the majority of the continent’s people. My contribution follows.

    The Zambia-South Africa Example

    Let me comment on the matter of comparative advantage that is used to explain (partly) why integration of national economies that are dissimilar in terms of their "capital" and "labor" endowments, such as Zambia and South Africa.

    The different versions and notions of economic thought implicitly prescribe the trade-policy choices of nation-states. For example, given the fact that the human and technological capabilities of developing countries are more suited to the production of primary commodities than manufactured goods, both classical and neoclassical theorists would generally--and almost certainly--advise governments in such countries to concentrate their efforts on the production and exportation of primary commodities.

    The same conclusion can be made about the implications of the theory of trade for the policies of countries in economically integrated regions like the Southern Africa Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the Economic Community of West African States (ECOWAS).

    But as experience, observation and common sense have taught us, the policy prescriptions of existing versions and notions of economic thought, if embraced, can only serve to perpetuate the backwardness that already exists in much of the developing world today. As such, developing countries’ economic pursuits and endeavors in the 21st century need to be focused largely on what is benign and advantageous to them in preference to what is conventionally or theoretically acceptable if they are to culminate in long-term socio-economic benefits. This unorthodox tenet of trade may, be conveniently dubbed as the "principle of expediency" in international trade.

    Contrary to the implicit policy prescriptions of the various versions and notions of trade theory, therefore, I would urge government leaders in less-industrialized countries to venture in the production and exportation of manufactures. I believe the reasoning for such advocacy is rational because, among a host of other important benefits, manufacturing can: (a) improve their countries’ terms of trade through stable export prices for, and greater export earnings from, manufactured goods; (b) facilitate the creation of high-wage jobs; (c) induce indigenous-based technological progress; and (d) facilitate the creation of strong backward and forward linkages in national economies.

    President Yoweri Museveni of Uganda, for example, articulated this vision just before midnight on December 31, 1999: "Africa must make the 21st ... [century] the century of industrialization." ("Y2K Briefing: Kampala, Uganda," Denver Rocky Mountain News, January 1, 2000, p. 46A.)

    The Potential Effects of Economic Integration

    There are generally four potential effects associated with economic integration; they are as follows: static effects, dynamic effects, trade deflection, and counterfeit labeling. A bird's-eye view of the nature of each of these effects follows.

    1) The "static effects" that are associated with the process of economic integration emanate from shifts (induced by the integration of any three or more national economies) in the production of certain export products from one member-country to another member-country, or from a nonmember-country to one of the member-countries. More specifically, static effects can result either in a shift in product origin from a high-cost member-country producer to a low-cost member-country producer (trade creation) or in a shift in product origin from a low-cost nonmember-country producer to a high-cost member-country producer (trade diversion).

    It can be argued theoretically, as has been done in one of the contributions on this subject on this blog, that "trade creation" can improve member-countries’ welfare (since such a shift would represent a movement in the direction of the free-trade allocation of a country’s resources), and that "trade diversion" can generally reduce member-countries’ welfare because it would represent a movement away from the free-trade allocation of resources.

    To the typical political leader under the sun, such knowledge belongs to the classroom!

    2) The "dynamic effects" of economic integration come about as a result of changes in member-countries’ economic performance and/or structures occasioned by a country’s membership in an inter-governmental organization (IGO). There are several dynamic effects associated with economic integration that are worthwhile for member-countries, and which the typical political leader would be capable of comprehending. I have cited these benefits in a Press Release I prepared for the news media earlier this month, and which I will reproduce later in this contribution.

    3) "Trade deflection" is the entry of imports from the rest of the world into a low-tariff member-country of a free trade area in a deliberate effort by either importers or exporters to avoid higher tariffs that may be levied by other member-countries. In a free trade area, therefore, high-tariff member-countries can lose much of their potential revenue from import duties to low-tariff member-countries through trade deflection.

    The only rational way in which this problem can be circumvented is for member-countries to consider the prospect of creating a customs union, or any of the other higher forms of economic integration--that is, a common market, an economic union, a monetary union, or a political union.

    4) Traders involved in trade deflection may attempt to dupe authorities in a low-tariff member-country of any given economic bloc by designating the imports involved as local manufactures in order to obtain the bloc’s certificates of origin, which they can use to freely export the foreign goods from the low-tariff country to other member-countries. For lack of an orthodox concept designed to function as a designation of this phenomenon, let us refer to it as "counterfeit labeling."

    PRESS RELEASE:
    THE 27TH ORDINARY SUMMIT OF SADC

    It is gratifying to learn that Zambians warmly welcomed to Lusaka the SADC Heads of State and Government, First Ladies, Ministers, the Executive Secretary, the Deputy Executive Secretary, the Chief Director, Heads of Delegations, and Delegates who had come to attend the 27th Ordinary Summit of the Southern African Development Community (SADC).

    I am confident that they all enjoyed the beauty, warmth, friendliness, and rich cultures and traditions of our beloved country and its people during their brief stay in Lusaka between August 10 and 18, 2007.

    Was It a Mere Political Gathering?

    The extreme and persistent poverty, hunger, disease, and a host of other problems that have come to characterize life in SADC member-countries in particular, and in the African Union in general, are certainly unprecedented in recent human history. And, to make things worse, there seem to be no easy solutions or quick fixes to the catalogue of socio-economic ills facing the African continent!

    Integration of Africa’s national economies, I believe, is one of the viable ways in which the continent’s sons and daughters are likely to redeem their Mother from its current state of socio-economic decay and backwardness. If it is diligently and relentlessly pursued, economic integration can actually facilitate the attainment of pronounced and sustained levels of socio-economic development in member-countries.

    As such, citizens in SADC member-countries expected Heads of State and Government to consider the Lusaka Summit as a great opportunity for them--individually and collectively--to seek and eventually pursue viable development strategies and initiatives that will lead to a meaningful improvement in the livelihoods of the citizenry in each and every SADC member-country.

    Given the enormous public resources that were committed to the convening of the Summit, we will all be disappointed if it turns out to have been a "talk show"--a mere political gathering characterized by rhetoric and speech-making that will not culminate in concrete action.

    Zambians, particularly, had very high expectations of the outcome of the Summit mainly because the Zambian government, as the host of the Summit, was responsible for providing transport and protocol facilities, and to provide security for all delegates during their brief stay in Lusaka.

    Local public resources were, for example, committed to cater for the following: (a) State Escort for each of the SADC Heads of State and Government; (b) One Chauffer-Driven Car for each of the visiting First Ladies; (c) One Chauffer-Driven Car for each of the visiting Ministers; (d) One Chauffer-Driven Car for the Executive Secretary; (e) One Chauffer-Driven Car for the Deputy Executive Secretary; (f) One Chauffer-Driven Car for the Chief Director; (g) One Chauffer-Driven Car for each of the Heads of Delegations; and (h) mini-buses for the transportation of Delegates between the conference venue and their respective hotels.

    Importance of Membership in the SADC

    SADC member-countries are not going to make any headway in socio-economic development if they cannot profoundly integrate their economies. The enormity of development hurdles facing much of the SADC region--including limited domestic markets, inaccessible foreign markets, lack of investment capital, and unfavorable terms of trade with industrialized nations--certainly calls for what may be referred to as "south-south" economic cooperation if the current socio-economic decay and backwardness in the region are to be redressed.

    SADC leaders, therefore, need to realize that their countries’ real future does not hinge on seeking the compassion of, or excessive and protracted reliance on, industrialized nations in matters of socio-economic development; rather, they need to take full responsibility for finding viable solutions to their countries’ socio-economic ills.

    There are many reasons why strong and permanent membership in a regional economic bloc like the SADC is essential in a country’s quest for sustained and heightened socio-economic development. Let us consider some of these reasons.

    1. A Competitive Edge.—There is a pressing need for Southern African countries to maintain strong and permanent membership in the SADC in order to become more competitive through cooperative scientific and technological endeavors and eventually be in a better position to venture in the modern global economic system that is characterized by such regional economic blocs as the European Free Trade Association (EFTA), the European Union (EU), the North American Free Trade Agreement (NAFTA) bloc of countries, the Organization of American States, the South American Community of Nations, the Arab Common Market, and the Association of Southeast Asian Nations (ASEAN).

    The successful conclusion of the Uruguay Round in December 1993 (which re-affirmed the need for an open, liberal and competitive international trading system) should particularly prompt SADC member-countries to move briskly in converting SADC from a mere regional grouping to a free trade area, a customs union, a common market, an economic union, a monetary union, and, ultimately, a political union.

    If they dilly-dally in taking up this challenge, they should not expect economic units in their countries to gain the necessary technological and industrial competence they need to be able to become sturdy participants in the potentially competitive global economy of the 21st century. In the longer run, the region’s leaders should not be surprised when their national economies turn into permanent retail outlets for commodities produced in various economic blocs around the world.

    2. Market Limitations.—A large population is an important element in a country’s quest for enhanced socio-economic development. Many development economists have recognized this fact, arguing that a large overall population can, among other things, increase the potential size of a country’s domestic market to a level that is economically favorable to an expansion in both local and foreign investment.

    For Southern African countries, this should be obvious considering the fact that ready access to foreign markets is thwarted by numerous and insurmountable export-related problems—including poor transportation infrastructure, inadequate information relating to foreign markets, dependence on the exportation of cheap primary commodities, and inadequate communications infrastructure. After all, it should be common sense that growing markets generally stimulate invention, rather than invention coming first and creating a market!

    The issue concerning the size of a country’s market may also be discerned in terms of population density. The low population densities of some of the countries in the Southern African region have partly made the provision of educational, healthcare and training facilities in the region’s countries difficult, and have also negatively affected agricultural development by complicating the distribution of essential tools, fertilizers and pesticides.

    The Malthusian view that population growth needs to be stemmed in order to prevent the misery, hunger and pestilence that can follow if the population exceeds the carrying capacity of a given physical environment does not, therefore, apply to most of sparsely populated, resource-rich Southern African countries. As such, global population control efforts need to be appropriately directed at countries whose population densities are excessive, such as Belgium, Germany, India, Japan, the Netherlands, the Philippines, Singapore, and the United Kingdom.

    In this regard, it is important to be mindful of the fact that African countries in general cannot benefit from economies of scale that are usually associated with large-scale production mainly due to the limited potential markets for their outputs. In other words, most African countries cannot achieve economies of scale in production due to their small populations and can, as such, benefit from large-scale production only through openness and regional integration.

    In addition to the problem of limited local goods markets, African countries cannot, by and large, depend on foreign markets as a "vent for surplus" for their products due to the inaccessibility of such markets.

    In short, Africa’s most urgent need is an internal market that is large enough to absorb African economies’ outputs of both agriculture and industrialization—and economic integration seems to be the most, if not the only, feasible way in which such an internal market can be created within a few years or so if African leaders are keen on pursuing the endeavor!

    In fact, the larger consumer and industrial markets that can be created through the integration of national economies can make it possible for member-countries to attract the foreign capital they need for boosting business activity and, among other worthwhile benefits, increasing the level of employment.

    3. Economies of Scale.—Economic integration is, among other things, a means of doing away with the disadvantages of small size, and of making possible the attainment of member-countries’ desired levels of socio-economic development; among other things, it can make it possible for member-countries to exploit both economies of scale and economies of scope, and to capitalize on differences in comparative advantage in the production of commodities.

    Also, there are important gains from economic integration that are associated with the opportunities for specialization made possible by the integration of markets; for example, economies of scale may be realized not only from the manufacturing industry, but also from the potential large-scale dispensation of public services and utilities.

    For certain kinds of public services, there may also be economies to be derived from operation over a wider geographical area. In the case of air and rail transport, for instance, there is a very strong case for operating on a large enough scale to make full use of both specialized abilities and any available machines of large capacity.

    4. Competitive Environment.—Another potential and benign effect of economic integration relates to the emergence of greater competition in commerce and industry in an economic bloc. The reduction or removal of trade barriers brings about a more competitive market environment and eventually reduces the degree of monopoly power that might have been present prior to integration.

    5. Stable Financial Market.—The eventual creation of a monetary union and/or an optimum currency area can facilitate the creation of a larger, more stable financial market since it can, among other things, eliminate exchange-rate variability in an economically integrated region. Also, the attainment of greater exchange-rate stability and certainty facilitated by a common currency can result in more stable and soundly based economic growth for an integrated region as a whole.

    Moreover, it can be reasoned that elimination of currency fluctuations within an integrated region can increase trade among member-countries, since such fluctuations inhibit business enterprises from expanding their operations in other member-countries. This seems all too obvious considering the fact that fluctuations in exchange rates can more than wipe out the normal profits from any given business organization’s sales.

    Further, it may be assumed that a monetary union can eliminate the need for member-countries that may experience a decline in the aggregate demand for their export products to consider currency devaluations—which are now proved to be both ineffective in correcting a country’s economic shocks and more likely to generate high levels of inflation—as a means of making their products competitive in other member-countries.

    Besides, economic integration can lead to intra-industry specialization so that all member-countries can produce and sell similar products, making them more alike and eventually reducing the chances of any one member-country becoming a victim of an economic shock.

    6. Terms of Trade.—By and large, Southern African countries, like all other developing countries worldwide, face unfavorable terms of trade (TOT) in their trade with industrialized nations; the price indices of their export products—that is, primary commodities—are generally lower than the price indices of the manufactured goods which they import from industrialized nations. The greater trade among African countries which is likely to culminate from economic integration can, on the other hand, lead to "even TOT," since their economies are generally at similar stages of industrialization.

    7. Other Rationales.—Economic integration can also benefit member-countries in terms of administrative savings which they are likely to realize from a reduction in the functions of the customs units of their governments, and, among other things, the greater bargaining power which they can collectively gain by being constituent members of a regional economic bloc.

    People Are Fed Up of the Blame Game!

    In every African country today, there is a general expectation (among the citizenry) for leadership with both vision and compass. Citizens are sick and tired of leaders who have continued to find scapegoats for their own failure to address the basic needs and expectations of the common people—leaders who have continued to attribute failure and mediocrity in governance to what have become traditional and convenient scapegoats; that is: colonialism, neo-colonialism, globalization, the World Bank, and the International Monetary Fund (IMF), among others.

    But really, can any of these scapegoats be faulted for bloated national governments which cannot live within their means, the electoral malpractices which block cadres of competent potential leaders from the realm of national leadership, or the hemorrhage of public resources through corruption and misappropriation?

    A few selected views on who is really to blame for Africa’s persistent socio-economic ills is perhaps in order at this juncture:

    (a) "We cannot avoid the fact that a lot of our problems in Africa arise from bad governance."—Julius K. Nyerere, "Governance in Africa: Address," http://www.uneca.org/, Addis Ababa, March 2, 1998.

    (b) "The failure of African rulers, African governments, African governance institutions ... account for the emergence of first, political decay, then socio-political instability, followed by social fragmentation, and finally political disorders in contemporary Africa."—Anice, L., "Descent into Sociopolitical Decay: Legacies of Maldevelopment in Africa," in Mulugeta, A., editor, Africa in the Contemporary International Disorder: Crises and Possibilities (New York: University Press of America, Inc., 1996).

    (c) The African continent has, thus far, been led by leaders who lack "creativity and ingenuity" and are slow "to understand how the world system operates."—Paraphrased from Mathurin Houngnikpo, "Stuck at the Runway: Africa’s Distress Call," Africa Insight, Volume 30/Number 1, May 2000.

    According to Alassane D. Ouattara, bad or poor governance can very easily be identified; among other things, it manifests itself through a large public sector and a small private sector, weak public institutions, and weak, complex, inequitable, and arbitrarily enforced rules and regulations. (Ouattara, A. D., "Towards Better Governance: The Next Stage of Africa’s Journey of Economic Reform," International Monetary Fund (IMF), June 27, 1998.

    It may, therefore, not be an exaggeration to conclude that it is, by and large, the leadership factor which has made post-independence Africa to become a haven for the following kinds of nation-states that are cited in the literature, and which Kingsley Y. Amoako has discussed in a speech entitled "Governance for a Progressing Africa: Opening Statement at the Second Africa Governance Forum," presented in Accra, Ghana, on June 25, 1998:

    (a) The Patrimonial State: A political setting in which government leaders treat the state as their own piece of property;

    (b) The Predatory State: A state in which government officials look upon the citizenry as prey for their rapacious greed;

    (c) The Shadow State: The kind of state that is generally characterized by informal political networks and a shadow economy punctuated by illegal activities; and

    (d) The Collapsed State: A state in which common people are generally left to their own devices while government officials revel in conspicuous, state-financed luxury.

    Further, Amoako has identified a fifth kind of nation-state--that is, a nation-state where leaders impose sufficient repression to keep their opponents weak and maintain their own power, while adhering to enough democratic formalities that they might just pass themselves off as democrats. Accordingly, we may refer to this additional kind of nation-state as "the repressive state."

    Membership in Both SADC and COMESA

    The current proliferation of integration projects in Africa has tended to result in some countries becoming members of two or more economic groupings. This is likely to generate commercial problems arising from obligations which individual African states have assumed under the different treaties and trade agreements governing the regional groupings.

    In 2002, the World Trade Organization (WTO) cited the problem facing the Republic of Zambia in this regard: the country’s membership in overlapping preferential trade arrangements has made its trade regime more difficult to manage given the different provisions, goals and geographical coverage involved.

    A prudent measure which African leaders can take in order to circumvent the potential problems and implications associated with membership in two or more economic blocs is to merge some of the economic blocs. In fact, such a measure can also forestall the potential for costly duplication of effort by regional economic blocs on the continent.

    The European Union’s advice (cited in Wasamunu, M., "EU Advises COMESA, SADC to Merge," The Post, http://www.zamnet.zm/zamnet/post/, February 10, 2000) to leaders of SADC and COMESA member-countries to merge the two institutions is, therefore, worthy of urgent and serious consideration; after all, this is an issue which leaders of the member-countries of the two regional blocs have generally shown great interest in resolving since the early 1990s.

    Preferably, the smaller SADC needs to be incorporated into the larger COMESA bloc. In August 1992, Dr. Frederick Chiluba (former president of Zambia) minced no words in stating some of the compelling reasons why it would be prudent for SADC and COMESA heads of state to seriously consider the prospect of merging the two regional economic blocs:

    "Having one institution is the way forward. It will combine resources and expertise which are currently dissipated in the two institutions. It will provide the wider market [needed] ... for achievement of economies of scale necessary for resilient economic production units."--Chiluba, F., Dr., quoted in Mandaza, I., "SADC: An Economic Agenda or a Mere Political Expression?" Southern Africa Political and Economic Monthly, August 1992, Volume 5, Number 11, p. 19.

    Henry Kyambalesa
    www.agenda123.com
    Founder and President
    Agenda for Change (AfC)

    ReplyDelete
  14. Sorry, folks, the second paragraph of my previous contribution should read:

    "Let me comment on the matter of comparative advantage that is used to explain (partly) why integration of national economies that are dissimilar in terms of their capital and labor endowments (such as Zambia and South Africa) would be disadvantageous to some of the members of an economic bloc like SADC, assuming that SADC member-countries are distinctly different in terms comparative advantage."

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  15. (c) induce indigenous-based technological progress; and (d) facilitate the creation of strong backward and forward linkages in national economies.

    Which is one thing that is lacking in this whole 'free trade', neoliberal view of globalisation.

    The Malthusian view that population growth needs to be stemmed in order to prevent the misery, hunger and pestilence that can follow if the population exceeds the carrying capacity of a given physical environment does not, therefore, apply to most of sparsely populated, resource-rich Southern African countries.

    Absolutely. Even if Zambia's population doubled (which it will in another 25 years) from 11 million to 22 million, it would still only have the population that Texas has today. There is a need for freeing up the land for agriculture and settlement, not population control.

    Plus, I always thought that Malthus' biggest shortcoming was that he didn't take into account the effects of technology.

    In the real world, when countries and agriculture develop, fewer and fewer people actually need to work the land, as agricultural tasks like sowing, watering, harvesting and processing are mechanized.

    Nowadays, agriculture can go beyond mechanized agriculture has no real limits on production, because there are machines that allow you to harvest 350 pieces of lettuce per year, *per square meter*. Thanks to NASA and hydroponics, which right now is the ultimate in technologically based agriculture. Nature is still best, of course, but that is a different issue.

    In addition to the problem of limited local goods markets, African countries cannot, by and large, depend on foreign markets as a "vent for surplus" for their products due to the inaccessibility of such markets.

    But there are still a lot of needs not being met. Food and fuel could be a lot cheaper, and there is a huge demand for consumer electronics. Also, a lot of the products where there sometimes are surpluses (like maize) should have industries that make products from those surpluses, to add value and earn foreign currency.

    I like SADC's focus on integrating regional infrastructure, which in itself could open up a lot of markets.

    I think we need to treat every country as constituting many local markets, and then help those markets connect with eachother.

    It may, therefore, not be an exaggeration to conclude that it is, by and large, the leadership factor which has made post-independence Africa to become a haven for the following kinds of nation-states that are cited in the literature, ...

    Which begs the question - what kind of policy support does the leadership have? I think that touches on both discussions we've had about thinktanks and other research institutes, as well as traditional leadership, which had several consulting institutions to help inform it's decisions.

    Why doesn't Zambia have it's own thinktanks and political/marketing research institutions? It has enough academics, and everyone complains about the brain drain. At the same time, everyone during the last election seemed at a loss about the people were thinking about the political candidates. So it seems to me that there would be more than enough demand for an independent research institute.

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  16. Murray says

    SOME QUESTIONS

    This debate on regional integration has raised several interesting questions which need to be recognised, appreciated and addressed - questions to which there are no easy answers.

    1. We all agree that Zambia's national boundaries are too limiting and need to be extended, perhaps politically, certainly economically. Should this extension be to the SADC boundaries, or include SADC and COMESA, or even the entire(formerly British) Commonwealth? As regards commerce, there is the question, 'Are any barriers at all satisfactory? Shouldn't we opt for free trade? And if further opening is desirable/necessary, how and when?' Cho puts it well:"How Zambia opens up to trade is the question, not whether it does".

    2. mrk says, "The real barriers to economic performance in Zambia are local, and until someone in power deals with them they will remain obstacles to economic growth". This directs attention to the politicians, the'leaders'. These are seen as the people who must act, yet they are also people in whom we have very little confidence. So can we really depend on politicians, consumed as they are by the 'vote motive'? Ought we perhaps to leave more economic decisions to the entrepreneurs, not in groups, but as individuals responding to the 'invisible hand'? Can we trust them? What is the role here of competition?

    3. mrk makes the valid point that consumers are also producers (and vice-versa). Which aspect, if either, deserves priority? Ought this to be decided and regulated by governments?

    4. kayambalesa quotes Museveni as saying that Africa must make the 21st century the century of industrialisation. Echoes of Stalin and Nehru. What did they achieve? Is this a matter for politicians to decide? Kyambalesa emphasizes manufcturing, which he sees as improving Africa's terms of trade.Is that straightforward? How about comparative advantage? Is exporting a question of producing for a protected home market and then selling the surplus abroad? Are the actions of China and India in regulating foreign investment replicable in Africa, where demestic markets for manufactures are, in world terms, minute?

    These are just a few of the imortant questions raised by this debate. I shall not attempt to offer answers. I just think it's important to emphasize them.

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  17. Murray,

    2. mrk says, "The real barriers to economic performance in Zambia are local, and until someone in power deals with them they will remain obstacles to economic growth". This directs attention to the politicians, the'leaders'.

    What I mean by that, is that a lot of the constraints on commerce are legal, and politicians, through parliament, are in an excellent position to do something about that. For instance, it has been remarked several times that the reason interest rates remain high, is because the law does not properly empower or protect creditors.

    Beyond legislation, taxation of domestic businesses and the like, the distribution of power is stipulated by the constitution. A better constitution would give more power to parliament and could even spell out how much of national revenues should be handed out to local government.

    These are seen as the people who must act, yet they are also people in whom we have very little confidence.

    Personally, I think the system as a whole should be a lot better. And not all politicians are the same. If LPM had better advisors, he would be doing a much better job of it. And of course individuals like Robert Sichinga or Hakainde Hichilema would just be a lot younger and sharper when in office.

    So can we really depend on politicians, consumed as they are by the 'vote motive'? Ought we perhaps to leave more economic decisions to the entrepreneurs, not in groups, but as individuals responding to the 'invisible hand'? Can we trust them? What is the role here of competition?

    Politicians in Zambia are also influenced by the fact that 1/3 of their budget (in 2004) comes from donor money, which means they pay a lot of attention to what the IMF and World Bank tell them. They can be lobbied too.

    3. mrk makes the valid point that consumers are also producers (and vice-versa). Which aspect, if either, deserves priority? Ought this to be decided and regulated by governments?

    My opinion is that in combination with building infrastructure, what we really should be doing is build a huge middle class (90% of the workforce or more).

    The way to do that is (broadbased):

    - universal education
    - universal healthcare
    - home ownership
    - SME ownership
    - farm ownership

    We tend to forget, but in the US, 2/3 of GDP ($6.7 trillion) is from the American consumer. 80% of GDP is Americans doing business with other Americans. And this is the most developed economy in the world.

    So if Zambia wants to grow it's economy beyond mining, agriculture and tourism, creating the Zambian consumer is the way to go.

    The above strategy also solves a lot of problems - poverty, food shortages, unemployment, lack of access to information on behalf of the electorate, etc.

    The ordinary Zambian citizen should really be the focus of all government policy. Especially considering that government is the representative of the people to begin with.

    Government policy, no matter what party in power, should be:

    - medium sized farms (100 hectares) in the countryside
    - SMEs for the cities
    - infrastructure creation by central government

    If national revenues ($1.1 billion in 2004) went 50% to local government and 50% to central government, the central government could do with the $600 million in 'donor money' whatever it pleased. It's main jobs would be infrastructure creation and national security. Basic needs of the people would be met at the local government level (education, healthcare, security/policing, public amenities, administration).

    I think that would be the way to develop Zambia.

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  18. Murray raises some fundamental questions that highlight the complexity of this debate. As he rightly notes, there are no easy answers! This is why it is a bit delusional for newspaper editors to make sweeping statements about ‘outcomes’ under certain trading regimes. Like all economic issues, the policy conclusions depend on the assumptions you make. And if we get those ‘assumptions’ too far from reality the damage we might cause may be worse than the problem we are trying to solve. I always say, we need to be ‘skeptical optimists’ not ‘headless hearts’. The skeptical optimist says, ‘I know theory says we’ll all be better off, but are the assumptions on which that theory is based consistent with the reality on the ground?’ The ‘headless heart’ sees a glorious vision of the future and ignores the difficult nuisances.

    With that in mind let offer my own views on Murray’s pressing questions:

    ”We all agree that Zambia's national boundaries are too limiting and need to be extended, perhaps politically, certainly economically. Should this extension be to the SADC boundaries, or include SADC and COMESA, or even the entire(formerly British) Commonwealth? “

    On SADC Vs COMESA Vs Commonwealth – there’s no doubt I think that we should be doing more to utilize the commonwealth. But at the same time I think infrastructure development is crucial within SADC. Zambia is landlocked. It needs to be at the heart of influencing its neighbours to develop infrastructure. That calls for deeper involvement with SADC, but the right level of involvement. The COMESA choice is a red herring .

    ”As regards commerce, there is the question, 'Are any barriers at all satisfactory? Shouldn't we opt for free trade? And if further opening is desirable/necessary, how and when?' “

    There are barriers that we must retain given the current imperfections in the system. The idea that we should have a world without economic borders is a noble goal, but in face of existing political borders not one we can take serious.

    ” So can we really depend on politicians, consumed as they are by the 'vote motive'? Ought we perhaps to leave more economic decisions to the entrepreneurs, not in groups, but as individuals responding to the 'invisible hand'? Can we trust them? What is the role here of competition?”

    These are really two questions – first, is there a role for Government in a market system? Secondly, even if the answer to the first question is ‘yes’, can we trust Government to act in people’s interests? The first question relates to the issue of how complete the market assumptions are – I have touched upon this already by noting that there are failures in the market that may necessitate protectionism in certain areas. The second question is an ‘institutional’ one. It relates to our system of governance, the level of transparence in the Government decision making process and crucially whether policy development is ‘evidence based’.

    ”Mrk makes the valid point that consumers are also producers (and vice-versa). Which aspect, if either, deserves priority? Ought this to be decided and regulated by governments?”

    Actually, I thought MrK’s point whilst valid does not undermine the pure market approach. Free market economists consider both the consumer and producer surplus in their assessments.

    ”Kyambalesa emphasizes manufcturing, which he sees as improving Africa's terms of trade.Is that straightforward? How about comparative advantage?”

    I also found the emphasis on manufacturing besides the point. Zambia needs to focus on areas where it has the comparative advantage.

    ”Are the actions of China and India in regulating foreign investment replicable in Africa, where domestic markets for manufactures are, in world terms, minute?”

    It’s an interesting point. Your point is whether India and China can dictate the terms at which they get FDI given their relative size. I have to think about this one…..but my immediate view is not some much about Zambia’s size relative to other nations, but what other nations’ approach to FDI is. Zambia is competing with other nations to attract FDI. If we erected barriers and other nations did not, we may suffer. It is possible that China & India approach to FDI worked because elsewhere the conditions for FDI were even more restrictive. I need to look further into this :)

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  19. Mrk,

    ”Personally, I think the system as a whole should be a lot better. And not all politicians are the same. If LPM had better advisors, he would be doing a much better job of it. And of course individuals like Robert Sichinga or Hakainde Hichilema would just be a lot younger and sharper when in office.”

    The problem in Zambia is structural. Its not really about individuals. I also don’t think the issue is about “better advisors”. Even if the President had the best advisors in the world they would not know everything. What the nation needs is a framework where all the people can contribute to debates and influence discussions. We need Green Papers/ White Papers/ Proper Consultations and so forth.

    ”Politicians in Zambia are also influenced by the fact that 1/3 of their budget (in 2004) comes from donor money, which means they pay a lot of attention to what the IMF and World Bank tell them. They can be lobbied too.”

    Sounds like a job for Zambians Abroad – right?

    ”- universal education
    - universal healthcare
    - home ownership
    - SME ownership
    - farm ownership


    Universal education is probably pointless without jobs. Here I would emphasise not universalism but the TYPE of education. We already know that only 3% of graduates have agriculture on their CV. Very poor. Why don’t we invest money in increasing the share of agriculture related courses in education, instead of universalism?

    Universal healthcare is a worthy goal. But how do you do that without blowing a hole in your budget? We need innovative ways of delivering this.

    ReplyDelete
  20. Murray says: “Kyambalesa quotes Museveni as saying that Africa must make the 21st century the century of industrialization ... Is this a matter for politicians to decide? Kyambalesa emphasizes manufacturing, which he sees as improving Africa’s terms of trade. Is that straightforward? How about comparative advantage?”

    Well, politicians can provide incentives designed to promote manufacturing activities. And the Principle of Expediency and other new versions and notions of economic thought are likely to become a death-knell for comparative advantage sooner or later. In fact, comparative advantage has never been, and will never be, the only basis of trade among countries.

    Let us explore (in a nutshell) where we are in terms of the evolvement of economic thought relating to trade among nations in discerning this prospect.

    1. MERCANTILIST IDEAS

    Essentially, the term “mercantilism” refers to a collection of economic views and ideas that were dominant between 1500 and 1750. Basically, mercantilist views and ideas were characterized by the general belief that a nation could become both wealthy and powerful by exporting more and importing less, thereby accumulating specie or precious metals like gold and silver.

    During this era, trade was conceived of largely as a zero-sum game; as such, countries strived to accumulate wealth at the expense of trading partners. Also, labor was regarded as the most important factor of production, and the merchant class as the driving force and an indispensable element in the accumulation of national wealth.

    Mercantilist trade policies are still pursued by governments today; examples include the United States Omnibus Trade and Competitiveness Act of 1988, currency devaluations (which are usually recommended by the IMF and the World Bank to countries that are beleaguered by recurrent trade deficits), export subsidies and incentives, and import restrictions (including tariffs and non-tariff trade barriers).

    2. CLASSICAL THEORY

    Mercantilist views and ideas gave way to new economic thought commonly referred to as “classical theory,” which essentially comprises the following: the theory of “absolute advantage” postulated in 1776 by Adam Smith in a book titled The Wealth of Nations, and David Ricardo's law of “comparative advantage” introduced in his Principles of Political Economy and Taxation published in 1817. A brief survey of the nitty-gritty of these two early contributions to modern economic thought follows.

    2.1 Absolute Advantage.—Adam Smith’s principle of absolute advantage may be paraphrased as follows: if country A is more efficient than country B in the production of commodity X, and if country B is more efficient than country A in the production of commodity Y, each country can benefit if it specializes in the production of the commodity in which it has an absolute advantage and exchange a portion of its output for a portion of the other country’s output.

    Efficiency in the theory of absolute advantage is measured in terms of labor productivity. Therefore, the basis for trade in this theory is a difference between the productivity of labor used in the production of commodities in country A and the productivity of labor used in country B.

    2.2 Comparative Advantage.—According to David Ricardo, however, the two countries in the foregoing example could benefit from trade even if one of them had an absolute advantage in the production of both of the commodities involved; the following is a summary of his theory:

    If country A is more efficient in the production of commodities X and Y than country B, both countries can still benefit from trade if country A specializes in the production of the commodity in which it has a greater absolute advantage and country B specializes in the production of the commodity in which it has the least absolute disadvantage, except when country B’s disadvantage is in the same proportion for both commodities.

    As in Smith’s theory of absolute advantage, the basis for trade in the principle of comparative advantage is a difference between the productivity of labor used in the production of commodities in country A and the productivity of labor used in country B.

    3. NEOCLASSICAL THEORY

    The trade models advanced by Adam Smith and David Ricardo were superseded by more advanced forms of economic thought collectively referred to as “neoclassical theory. These are: the opportunity cost theory, and the Heckscher-Ohlin trade model. A brief survey of these two trade models follows.

    3.1 Opportunity Cost Theory.—In a nutshell, this theory attributes trade among nation-states to differences in the relative prices of their commodities, or opportunity costs if prices are assumed to be equal to costs of production. Essentially, the “opportunity cost” of a commodity is defined as the amount of a second commodity that must be given up in order to free enough resources for application in the production of one additional unit of the first commodity. This definition may also be paraphrased as follows:

    Given commodities X and Y, the opportunity cost of commodity X is the amount of commodity Y that needs to be given up in order to release enough resources for use in the production of an additional unit of commodity X.

    Therefore, “efficiency” in the opportunity cost theory is measured in terms of relative commodity prices rather than labor productivity. As such, a low relative commodity price will give a country a comparative advantage in the production and exportation of the commodity involved; its trading partner will, thus, need to specialize in the production and exportation of the other product in which its relative disadvantage is lower.

    The basic reason why relative commodity prices will tend to differ among nations is provided in the ensuing sketch of the Heckscher-Ohlin trade model.

    3.2 Heckscher-Ohlin Model.—In 1933, Bertil Ohlin authored a book in which he, among other things, refined a theory initially developed by Eli Heckscher fourteen years earlier; his work gave birth to the modern theory of international trade, which is commonly known as the “Heckscher-Ohlin” trade model. Alternately, the model is referred to as the “factor-proportions” or “factor-endowment” theory, and is usually analyzed in terms of two theorems—that is, the Heckscher-Ohlin (H-O) and the Heckscher-Ohlin-Samuelson (H-O-S) theorems.

    The H-O theorem deals with the basis for, the gains from, and the pattern of trade; it may be outlined in a nutshell in the following words:

    Given two commodities and two factors of production, a country will export the commodity whose production requires the use of greater amounts of its relatively abundant and less-costly factor and import the commodity whose production requires the use of greater amounts of its relatively scarce and costly factor.

    A simple illustration of what this theory entails is perhaps in order here: if a country is, in relative terms, endowed with abundant and low-wage labor, it should specialize in the production and exportation of labor-intensive commodities and import capital-intensive commodities from another country which has abundant and cheap capital, since the prices for its labor-intensive commodities will be relatively lower. According to the H-O theorem, therefore, both comparative advantage and the pattern of trade are determined by differences in relative commodity prices among countries brought about by differences in the stock of factor endowments.

    The H-O-S theorem, also known as the “factor-price equalization” theorem, is an extension of the original H-O trade model; it owes its origin to Paul Samuelson, who contributed to the H-O model by demonstrating the effect of trade on earnings of factors used in the production of commodities traded across national borders. The following narrative portrays the gist of the theorem:

    Trade among countries will lead to an equalization in the earnings of similar factors used in such countries to produce the commodities they export to each other.

    4. NEW TRADE THEORIES

    The 1960s witnessed a mushrooming of trade models based on variables other than factor endowments; they include the following:

    4.1 Overlapping Demand.—In 1961, Staffan Linder sketched a theory in which he attributed trade in manufactured goods to similarities in consumer tastes and income levels among trading nations. According to the Linder theory, then, a country’s exports will consist of products for which a large domestic market exists, and which local firms have developed the necessary competence and efficiency to produce; such products, therefore, become the source of the country’s exports to countries which have similar tastes and income levels. The country's imports will, thus, be composed of products that appeal to small segments of local consumers who have special tastes and/or unusual incomes.

    4.2 Innovative Capacity.—There are two important trade models or paradigms which are based on the innovative capacities of nation-states; these are: the “technological gap” or “imitation lag” hypothesis postulated by Michael Posner in 1961, and the “product cycle” hypothesis enunciated in 1966 by Raymond Vernon.

    The technological gap model attributes much of the trade that occurs among industrialized nations to the continuous creation of new high-technology products and production processes in these countries. According to this model, the most innovative of such countries are always a step ahead developing new products and/or production processes for export to less-innovative nations; and, as the less-innovative countries eventually gain a greater competitive edge in the manufacture and exportation of the new products and production processes to the innovators and the rest of the world, the innovators proceed to introduce even newer products and production processes. Thus, the innovators incessantly maintain the technological gap.

    The product cycle hypothesis is basically an extension of Posner's technological gap model; according to this hypothesis, new products are introduced into the global marketplace in three distinct stages as follows:

    (a) New Product Stage: Initially, a product is developed by an innovative firm in the industrialized world and is largely sold and consumed in the firm’s domestic;

    (b) Maturing Product Stage: Wide acceptance and highly profitable sales of the new product in the domestic market eventually attract a stream of competitors, and also generates the need to launch the product in new markets abroad; and

    (c) Standardized Product Stage: Foreign manufactures can now produce the standardized product at a much lower average cost per unit and successfully export it to the innovator's domestic market, prompting the innovator to introduce a newer and more profitable product.

    4.3 Returns to Scale.—In 1964, Murray Kemp developed a trade model based on economies of scale. According to the model, increasing returns to scale can lead to mutually beneficial trade even among countries which may be identical in terms of, say, factor endowments and relative commodity prices. Increasing returns to scale entail a situation where production output increases proportionately more than increases in inputs used to produce the output; they are often associated with large-scale production.

    There are a number of reasons why large-scale production often leads to increasing returns to scale (or falling costs per unit of output); they include the following: (a) the use of more productive and specialized machinery; (b) division of labor, or task specialization; and (c) continuous and/or longer production runs.

    4.4 Differentiated Products.—Intra-industry trade (IIT), which is also sometimes referred to as “trade overlap” or “two-way” trade, occurs when a country’s imports include commodities which are similar to some of the commodities produced within the country and exported to other countries. In general, commodities involved in this form of trade are not perfect substitutes, hence making it possible for cross-border trade in the commodities to take place.

    Product differentiation, then, accounts for much of the IIT among nation-states today; essentially, this is a strategy or process whereby companies that produce similar commodities attempt to establish in people's minds the relative superiority and preferability of their product offerings through aggressive marketing campaigns. Different versions and assortments of commodities produced by similar manufacturing industries in various countries are, thus, simultaneously imported and exported by countries to meet the diversity of people’s tastes for the differentiated products.

    In any given country, therefore, manufacturers of a particular class of products will produce varieties of the products to cater to majority tastes in the domestic market and for export; segments of consumers with tastes for special versions and varieties of the products that meet their levels of income will, thus, have their needs met through imports.

    It is important to note, however, that IIT in homogeneous products occurs as well. This may be caused by transportation and selling costs; people who live near national borders, for example, may find it less costly to import goods from neighboring countries than to obtain the same kinds of goods from local suppliers located farther away within their own countries.

    Government distortions in the marketplace, among a host of other things, can also cause IIT in homogeneous products. For example, if a country’s government directs suppliers of a particular class of products to export much of their outputs in a bid to earn foreign exchange for the country, local consumers and retailers of such products will find it inevitable to obtain the products through imports.

    In modern times, IIT has become as important and as widespread as the inter-industry trade traditionally addressed by both classical and neoclassical theorists. In trade among industrialized nations particularly, IIT is increasingly becoming more important than inter-industry trade; this is perhaps to be expected considering the fact that large numbers of consumers in such countries have the financial means to pay for cosmetic features that are characteristic of differentiated products.

    And, by and large, manufacturing companies in the industrialized world have the technological capabilities to meet consumers’ quest for greater product variety.

    4.5 Trade in Gifts of Nature.—Exports and imports of resources that exist in nature (such as iron, gold, crude oil, diamonds, copper, coal, beryl, uranium, ivory, wild animals, guano, seashells, and the like) are not directly addressed in any of the existing theories of trade. This is a serious oversight on the part of theorists considering the fact that such special gifts of nature are a major source of export revenues for a lot of countries, particularly in sub-Saharan Africa.

    4.6 Phenomenon of Product Origin .—The question of whether “made-in” labels are of any significant consequence in the exportation of goods by a country’s economic units has recently received wide attention. It is argued in the literature that “country?of-origin” images are of the most immediate interest in the case of products which are marketed in a country other than the one in which they are produced, and that exporters face established importing-country images regardless of whether or not the exporters themselves have taken an active part in creating the goods involved.

    It is found that perceptions of the sourcing country entail the following: (i) “cognitions” pertaining to the country’s degree of industrial development and technological advancement, among a host of other things; (ii) “affect” or feelings regarding the country’s people; and (iii) a “conative” component relating to any given importer’s desired level of interaction with the source country.

    Finally, it is tempting to characterize the bases of trade among nations as follows:

    (a) North-South trade: comparative advantage, and innovative capacity.

    (b) North-North trade: product differentiation (intra-industry trade), and returns to scale.

    (c) South-South trade: Overlapping demand, and gifts of nature.

    Well, I guess I have digressed enough from the original discussion on economic integration. Let us now wait and see if I have succeeded in provoking some tangential debate.

    Kyambalesa

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  21. Oh, I forgot to include "factor proportions" or "factor endowments" to the bases of trade in North-South trade.--Kyambalesa

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  22. Cho,

    The problem in Zambia is structural. Its not really about individuals. I also don’t think the issue is about “better advisors”. Even if the President had the best advisors in the world they would not know everything.

    Well if he had better advisers, they might suggest just that - a whole new approach to governance and the economy.

    Sounds like a job for Zambians Abroad – right?

    It is a job for everyone, but especially Zambian civil society. I think it is time they started to have contacts with these Bretton Woods institutions, instead these institutions having contacts with just the President.

    They are the ones with the hands on knowledge, and they could help direct them in the right direction. Especially right now, when they themselves are getting tired of neoliberalism.

    Universal education is probably pointless without jobs. Here I would emphasise not universalism but the TYPE of education.

    Actually I agree with that to an extent. There should be more emphasis on vocational training, and business training. However, it is still essential that every child goes to school. Most countries in the EU have a minimum school leaving age, just to make sure that all children go to school for at least 11 or so years (depending on where the age is set).

    I completely agree that the government should intermediate between business and the graduates, to make their transition school to work as smooth as possible, or even help them set up their own businesses in Zambia.

    Universal healthcare is a worthy goal. But how do you do that without blowing a hole in your budget? We need innovative ways of delivering this.

    It has been done before, under KK. It is all a matter or priorities.

    And what budget? We're losing hundreds of millions in these ministries, a lot of it from overcharging and other corruption.

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  23. Addendum to the "manufacturing" / "comparative advantage" peripheral debate:

    1) If the originators of the theory of trade were with us today, they would have perhaps introduced a new theory that would have taken into account the fact that a lot of manufactures that are on the shelves of retail outlets in industrialized countries are actually produced in developing nations by both local and foreign investors.

    2) There is no country today (less-developed or otherwise) that does not have some measure of manufacturing activity. When you make wheelbarrows and/or lawn mowers in Kitwe, for example, you are actually engaged in manufacturing. And it is even possible that you manufacture these products at lower per unit costs than the average American manufacturer.

    3) Export processing zones (EPZs) that are dotted across the developing world are furnished wit facilities and services for manufacturing, not for processing primary products. They provide a good example of a desire by less-developed countries (LDCs) to engage in the production of manufactures for export.

    By the way, the number of LDCs with EPZs has grown tremendously since the early 1960s when the first of such facilities in the developing world were created in Hong Kong and Puerto Rico. By 1984, there were at least 41 developing countries with operational EPZs, including the following: (a) Hong Kong, South Korea, Taiwan, Singapore, the Philippines, India, Malaysia, Indonesia, Sri Lanka, China, Thailand, Bangladesh, and Pakistan in Asia; (b) Jordan, Syria, Cyprus, and Malta in the Middle East; (c) Mauritius, Tunisia, Egypt, Liberia, and Senegal in Africa; and (d) Puerto Rico, Mexico, Barbados, the Dominican Republic, Venezuela, Panama, Brazil, Haiti, El Salvador, Guatemala, Colombia, the Bahamas, Jamaica, Honduras, Belize, Bermuda, Nicaragua, Chile, and Costa Rica in Latin America and the Caribbean.

    And we await the establishment of similar facilities in Ndola, Kabwe and Livingstone.--Kyambalesa

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  24. Kyambalesa,

    ”In fact, comparative advantage has never been, and will never be, the only basis of trade among countries.”

    I understood, perhaps wrongly, that Murray’s point was that comparative provided superior route to greater welfare gains. As you documents there are plenty of basis for trade, the question is which of those provides greater welfare gains. And in answering that question, we must appeal to empirical evidence and what history has shown to work.

    Crucially, we must also check whether the assumptions on which the various ‘theories’ are built reflect reality.

    ”During this era, trade was conceived of largely as a zero-sum game; as such, countries strived to accumulate wealth at the expense of trading partners.”

    I accept that the mercantilist approach once provided the basis for trade, but history shows that most of the countries that depended on that approach either declined or where slowly forced to abandon. The question therefore is whether any country serious can grow and maintain its dominance behind trade barriers?

    ” 4.5 Trade in Gifts of Nature.—Exports and imports of resources that exist in nature (such as iron, gold, crude oil, diamonds, copper, coal, beryl, uranium, ivory, wild animals, guano, seashells, and the like) are not directly addressed in any of the existing theories of trade. This is a serious oversight on the part of theorists considering the fact that such special gifts of nature are a major source of export revenues for a lot of countries, particularly in sub-Saharan Africa.”

    I think H-O-S explanation based on factor endowment incorporates the gifts of nature. Those resources are endowments like anything else.

    ”Finally, it is tempting to characterize the bases of trade among nations as follows:

    (a) North-South trade: comparative advantage, and innovative capacity.

    (b) North-North trade: product differentiation (intra-industry trade), and returns to scale.

    (c) South-South trade: Overlapping demand, and gifts of nature. “


    I have problems with (c) as I don’t really think “gifts of nature” explain South – South trade, but assuming that I accepted the general approach, the real question is what should be the emphasis of a developing nation like Zambia? Where can Zambia find most gains from trade? Is it through North-South or South – South? The answer must be North – South. And that is the central point. Yes a manufacturing approach may well sit well with South-South trade, but if we believed that the road to better gains is based on North – South then we would be implicitly acknowledging the robustness of comparative theory as the viable basis for trade.

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  25. MrK,

    ”Well if he had better advisers, they might suggest just that - a whole new approach to governance and the economy.”

    There’s a little matter of the manifesto. Presumably the President follows the manifesto? He can’t simply introduce a new approach and abandon the manifesto. Personally, I think what Zambia lacks is external ideas not internal ideas. Any Government needs challenges to its thoughts to stay on course and those challenges are most effective when there are non political. Zambia lacks this.

    “It is a job for everyone, but especially Zambian civil society. I think it is time they started to have contacts with these Bretton Woods institutions, instead these institutions having contacts with just the President.”

    What we need are chaps who prepared to lobby the IMF. I P A Manning recently wrote a letter to the IMF. Now I don’t know the full background to the issue (and I think he is non-Zambian) I think it relates to a court action he is taking against the Government.

    http://zambiaconservation.blogspot.com/2007/09/zambia-high-court-action-4-september-07.html

    The actual letter to the IMF seems to have now disappeared. Don't why he removed it - perhaps under intimidation. I'll ask him. I wonder how many Zambians have ever written to the IMF with a complained or presented a paper to them on the way forward?

    By the way do check this other blog from him – its very interesting:
    http://zambialandsafe.blogspot.com/

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  26. Kyambalesa,

    Thank you for your concise and helpful summary of trade theories historical and current! I think that while many of the concepts may not be unfamiliar to many of us in some guise, the utility of a shared reference vocabulary may prove invaluable in discussing their application in the Zambian context. Am I correct however in assuming that based on your earlier stated position that, "developing countries’ economic pursuits and endeavors in the 21st century need to be focused largely on what is benign and advantageous to them in preference to what is conventionally or theoretically acceptable if they are to culminate in long-term socio-economic benefits," you do not personally view any (or all) of these theoretical models as sufficiently robust to guide Zambia's trade development?

    Additionally, on the subject of EPZs, it is my impression that the experience of LDCs is less than uniformly positive (e.g. Jamaica as described in the Life and Debt documentary MrK referenced). I am curious if you are aware of any common factors influencing the degree of benign advantage LDCs are able to leverage out of EPZs on their territory?

    I am tempted to assume that EPZs which emphasize value addition to locally generated resources (including renewable, semi-processed and "gift of nature" types) are more likely to provide benign access to competitive advantages for local populations. The Warm Springs example suggests that there may be better options than EPZs emphasizing FDI for the purpose of providing localities with sustainable economic growth consistent with traditional values and local direction. The utility to Zambia of an economy of scale and/or regional integration might be best viewed through a lens which focuses on the maintenance of small scale, local autonomy.

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  27. "I think H-O-S explanation based on factor endowment incorporates the gifts of nature. Those resources are endowments like anything else."

    Cho, "factor endowments" in the H-O-S trade model are defined strictly in terms of labor and capital. In my previous contribution, I deliberately paraphrased what the H-O model entails in order to reflect this aspect.

    Inclusion of gifts of nature in the model would deal a very serious blow to its ability to explain the basis and pattern of, and the gains from, trade among nations. In fact, inclusion of gifts of nature in the model would effectively trash Paul Samuelson's factor-price equalization theorem, since the theorem is entirely based on earnings of labor (wages) and capital (interest).

    I am still in the process of preparing some answers for Yakima.

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  28. Kyambalesa,

    Quite right. I accept that it is not strictly modelled but it does not appear beyond the model! Land is after all a factor of production.

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  29. For Yakima (from Kyambalesa):
    It is neither uncommon nor unreasonable for a country’s leaders to deliberately pursue an industrialization and trade strategy that is designed to disentangle their country from being a perpetual net exporter of primary commodities to a net exporter of manufactures.

    As I have stated before in one of my earlier contributions, a government may seek to pursue such an industrial and trade strategy not for its own sake but to achieve certain national objectives, such as the following:

    (a) To generate high-paying manufacturing jobs;

    (b) To shift resources from the production of primary commodities (whose prices are generally very low and unstable) to the production of the more profitable manufactures;

    (c) To create forward and backward linkages in the national economy; and

    (d) To spur indigenous-based technological development.

    The principle idea in this scheme of things is to create a comparative advantage that is suited to the production of manufactures, which require the use of high-tech inputs in the form of technologists, research and development (R&D) and machinery and equipment.

    Needless to say, the transformation of a country like Zambia from being a labor-abundant, low-wage country to a capital abundant, low-interest country would require enormous and sustained investments in science and technology (S&T), R&D and the human capital. This is perhaps one of the basic reasons why meaningful industrialization has continued to elude poor countries like Zambia.

    However, I believe this is the way forward for Zambia. What is needed really is for us to use our meager financial resources more rationally in order to accumulate savings for investment in this direction, among other worthwhile purposes.

    A more ambitious approach in this regard is to pursue what has been referred to as a "strategic trade policy," which represents an attempt by a country to use temporary trade restrictions, tax incentives, subsidies, and cooperative government-industry programs in a deliberate effort to create a comparative advantage in high-technology industries (such as those pertaining to telecommunications, computers, and semi-conductors) which have the potential to support future economic growth.

    Industries involved in this respect are normally those that have the following characteristics:

    (a) They are subject to very high investment risks;

    (b) They require large-scale production in order to achieve economies of scale; and

    (c) They are likely to give rise to extensive external economies, that is, they have the potential to produce benefits like new ideas, information and/or knowledge that investors in them cannot appropriate to the exclusion of other economic units.

    Let me devote the remainder of the discussion to a brief survey of trade and industrial strategy in terms of export-oriented and import-substitution industrialization, and the query relating to export processing zones.

    Trade and Industrial Strategy

    For the typical developing economy, the trend has generally been to pursue either export-oriented or import-substitution industrialization. Each of these two strategies has its own merits and drawbacks.

    Import-Substitution Industrialization.—This is advantageous for a number of reasons. First, the local production of previously imported commodities benefits from an already existing market for such commodities in a country. Moreover, it is usually much easier for a country to protect local suppliers of import substitutes from foreign competition and assure them of a stable local customer base than to aid them in gaining access to export markets.

    The major drawbacks with an import-substitution strategy include the huge capital outlays required in setting up local industries to produce import substitutes, the greater unemployment which is likely to be brought about by the capital-intensive nature of the industries that may be set up, and the diseconomies of scale associated with creating industrial units to produce for a small and limited local market. Moreover, the high dependence of local producers of import substitutes on imported capital an intermediate goods leads to balance of payments (BOP) problems.

    Further, the protection of local suppliers of import substitutes from competition makes such suppliers to be lax and complacent, a situation which usually culminates in gross inefficiency in protected infant industries. Besides, the opportunity cost associated with the concentration of resources on one industry are very high for a poor country; in fact, import-substitution industrialization can lead to the withering of other important sectors of a country's economy if it is pursued to the extreme.

    Export-Oriented Industrialization.—This, too, has both advantages and disadvantages for the typical less-developed country (LDC). Its advantages include the economies of scale associated with local firms having access to a larger and unlimited potential market, as well as its potential to stimulate local industries to seek innovative ways and means of producing internationally competitive commodities.

    Its major drawbacks emanate from the impermeable nature of the export markets due to trade barriers and, like the import-substitution strategy, the massive capital outlays needed to create a viable export industry, the high opportunity cost associated with the strategy, and the high level of unemployment which may result from the capital-intensive nature of an export-oriented industry.

    Therefore, there is a need for a government to choose an industrial and trade strategy that has the potential to achieve national objectives, while taking into account the merits and drawbacks associated with the alternative strategies.

    It is of necessity to note, though, that countries that have tried the import-substitution strategy like Zambia (mainly during the Second Republic) have generally been unable to achieve desired results. Export-oriented industrialization, on the other hand, has generally proved to be potent in revamping a country’s economy, as evidenced by the success story of the newly industrialized countries (NICs) that have successfully used the strategy.

    Therefore, Zambia needs to pick a leaf from the tale of the NICs and strive to export her way out of economic stagnation and despair. In general, it is perhaps even more important for a country to consider a sequential application of the two strategies: import substitution in the initial stage of development to facilitate the evolvement of a viable local manufacturing sector, and export orientation at a later stage of development so that local suppliers can, among other things, benefit from the economies of scale and economies of scope associated with having access to the large and unlimited global export market.

    There are several factors that could have partly affected our ability to benefit from import-substitution policies during the Second Republic, such as the following:

    (a) Our initial failure to diversify economic activities away from the mining industry subjected the national economy to the vagaries of steep decreases in copper prices and production levels.

    From 1992 to date, however, there has been a seemingly unplanned and slight shift toward an "export-oriented" strategy, whose emphasis is to promote the production of non-traditional exports (NTEs)—that is, commodities initially constituting only a small proportion of Zambia's export portfolio, if at all, which the Government has now decided to promote in its export drive.

    (b) Unprecedented hikes in petroleum prices by the Organization of Petroleum Exporting Countries (OPEC) in 1973/74 and 1979/80 resulted in a steep rise in the price of imported oil from US$2.50 to US$35 per barrel, thereby draining the public treasury.

    (c) Rampant economic and public-sector mismanagement resulted in diversion of human, financial and other national resources to unproductive projects and programs. For example, the creation of the Central Committee (a somewhat parallel structure to the National Assembly) and the position of Prime Minister that followed the introduction of a one-party State in 1972 contributed greatly to the misappropriation of public resources.

    (d) The socialist policies pursued by the United National Independence Party (UNIP) barred both local and foreign private investors from certain commercial and industrial sectors of the country’s economy and recommended the creation of state and parastatal companies to operate in such sectors of the economy from the late 1960s to 1991.

    Naturally, the monopolistic position enjoyed by both state and parastatal companies in the country’s economy culminated in complacence and gross inefficiency because, in the absence of competition, they apparently found it unnecessary to seek innovative ways and means of improving the quality and quantity of their product offerings. The rampant commodity shortages that Zambia experienced prior to 1991 were largely a direct result of the socialist policies of the government of the day.

    (e) UNIP’s postponement of the macro-economic adjustment—which would have enabled us to create a competitive and more productive socio-economic system—in May 1987 exacerbated the situation.

    Export Processing Zones (EPZs)

    In addition to the provision of attractive investment incentives, a country may create an EPZ as a means of attracting export-oriented foreign direct investment. The Export Processing Zone Bill assented to by Dr. Frederick Chiluba in November 2001 is, thus, a welcome feature in our country’s quest for sustained socio-economic development. There is no doubt that the zones, earmarked for Ndola, Kabwe and Livingstone will create employment opportunities for our people, especially if the government will succeed in attracting enough foreign investments into the facilities.

    It is, however, important to note that such investments—whether they are made in a country’s EPZs or main economy—can have both advantages and disadvantages, some of which are cited below.

    Potential Benefits.—Foreign investors can make it possible for our country to gain access to investment capital and advanced technology; contribute to the creation of employment opportunities; introduce new products, thereby affording consumers greater choice; contribute to tax revenue; promote exports, thereby contributing to the generation of foreign exchange; boost competition and, thus, prompt local businesses to strive for greater efficiency; promote local businesses which supply inputs and/or render services required by the investors; and, among other benefits, contribute to the development of local managerial talent.

    But whether or not adequate inflows of foreign investment can be attracted into a country in order for these potential benefits to be realized will depend on many factors, including the attractiveness of investment incentives and the adequacy of public services and facilities needed by investors in order to create economic values at reasonable costs and prices.

    Investment Incentives.—The various forms of incentives a country may decide to extend to investors may, therefore, be defined in terms of the basis on which they may be given as follows:

    (a) Activity-based incentives, intended to encourage a particular project or activity, such as research and development (R&D), use of local inputs, employee training, contributions to the needy, or creation of jobs for disadvantaged citizens;

    (b) Organization-based incentives, targeted at selected institutions that provide certain essential goods and/or services;

    (c) Industry-based incentives, intended to facilitate the success and survival of, say, the publishing industry, the iron and steel industry, and/or any other industries that are critical to the overall performance of a country’s economy;

    (d) Sector-based incentives, aimed at revamping a particular sector of a country's economy, such as the primary sector, the secondary sector, or the tertiary sector;

    (e) Region-based incentives, designed to promote investments in a particular region or province of a country that may be relatively under-developed; and

    (f) General incentives, provided indiscriminately to all business and non-business institutions in a country, such as incentives intended to enhance productivity, stimulate innovation, or promote economic diversification and circumvent the "Dutch disease" syndrome.

    Besides, investors have certain needs and expectations that a government needs to address:

    (a) A well-developed transportation infrastructure and adequate transportation services to commercial, industrial, and residential areas;

    (b) Adequate public services and facilities, such as police protection, fire protection, public utilities, and low-cost housing, and modern educational, vocational, recreational, and health care facilities;

    (c) Equitable taxes, including attractive tax concessions, and political and community leaders who are fair and honest in their dealings with private businesses;

    (d) Sound and stable economic policies, including a formal assurance that the Government would neither expropriate nor nationalize private businesses; and

    (e) Less-costly bureaucratic procedures and regulatory requirements pertaining to the issuance of business permits and licences.

    Potential Costs.—There are also potential costs associated with the operations of foreign investors. For example, such operations can: cause dislocations in our country’s balance of payments (BOPs), particularly if they externalize large sums of money either scrupulously or through transfer pricing; subject local businesses which do not have the necessary human, material and financial resources to compete effectively with them to unfair competition in industrial, consumer and labor markets; contribute to the degradation of the fragile physical environment through air, water and solid-waste pollution; and/or introduce foreign social values and behavioral patterns that are likely to disrupt our cherished moral and cultural practices.

    Besides, a couple of serious issues associated with EPZs—or "maquiladoras," as they are commonly referred to in Central and South America—need to be seriously considered; they are as follows:

    (a) Business institutions which operate in EPZs are often faulted with subjecting the local people they hire to inhumane and exploitative work conditions—a situation which should, of course, be expected considering the fact that governments generally forsake citizens employed in the zones and choose to shield the companies from trade unionism and compliance with existing labor laws.

    (b) The subsidies, tax inducements, and other incentives and facilities which may be provided to foreign investors in EPZs can represent a significant opportunity cost to a country as a whole.

    Costs versus Benefits.—For a country like ours, which is striving to break the bondage of its people to misery, want and destitution, the potential benefits of foreign investment certainly outweigh the potential costs of such investment. In fact, the potential costs associated with such investment are normal effects of a live economy, and which can reduce to acceptable levels through regulatory and administrative mechanisms.

    In conclusion, what we really need is for each and every one of us to look in the mirror, and to ask the person we see therein whether or not he or she would continue to shirk the moral obligation to make a more meaningful contribution to the improvement of the livelihoods of our fellow citizens who are eking out a mere living. I believe each and every day that we live gives us the opportunity to reflect seriously on the problems facing humanity, and to seek viable ways and means of improving the human condition.

    -------------------------

    Definitions:

    Dutch disease: The term coined in the late 1970s to describe a dislocation in a country’s economy caused by a sudden or gradual shift of labor, capital and other resources to one booming sector of the country’ economy. The term was coined after the Netherlands had experienced a dislocation in its economy following the discovery, exploitation and highly profitable exportation of natural gas.

    Infant industry: A new and/or undeveloped business enterprise or group of enterprises whose financial and competitive positions are weak, making it unable to compete effectively against strong foreign competition in the domestic market and, as such, requiring the protection of the home government until it develops a strong financial and competitive position.

    Import substitutes: Commodities that a country simultaneously produces locally and imports from other countries due to incomplete specialization in the local production of the commodities. Or commodities that are initially imported into a country until the country’s government decides to create a local industry to produce them and imposes trade barriers to prevent the importation of the commodities.

    Import substitution: The local production or processing of products that are usually imported into a country. Or the process of reducing a country’s dependence on imported production inputs by imposing levies on imports and providing incentives for discovery and use of local inputs.

    Import substitution policies: State or government policies aimed at encouraging or inducing the local manufacture or processing of products that are traditionally imported into a given country.

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  30. Just an aside, but check out this video on hydroponics - 500 pieces of lettuce per square yard, per year, because of technology.

    This totally puts the kybosh on Malthus's theories.

    http://www.youtube.com/watch?v=FHBhyqowSEc

    ReplyDelete
  31. Kyambalesa,

    Thank you for your thorough explanation of the role of EPZs in development. If I read you correctly, then the sorts of terms which Zambian negotiators should try to wring out of FDI in establishing EPZs would include:

    +Promotion of local businesses in provision of manufacturing inputs, as well as local labor.

    +Full compliance with local labor laws including occupational health and safety, wage and benefit compensation, and unionization.

    +Prevention of pollution, both of the natural environment and of cherished local traditions.

    +Diversify the national manufacturing and export base, both by economic sector and geographic region.

    +Improve the national infrastructure for service delivery and/or defray the operational costs thereof.

    +Activity based incentives applied in a targeted fashion to address specific needs.

    On the other hand, negotiators should be prepared to concede certain items in order to attract sufficient FDI inflows, such as:

    -Favorable customs and taxation rates coupled with decreased regulatory licensing and reporting costs.

    -Formal assurances of investment stability and cooperation from government authorities at the state and local levels.

    -Government investment in improved transportation and public services in areas in and around EPZs, as well as improved options for freight export.

    -Opportunity to compete in local markets with domestic producers, hopefully improving the performance of the latter rather than bankrupting them.

    -Activity based incentives applied in a targeted fashion to address specific needs.

    The sum of such negotiation then determining the degree of advantage gained from the opportunity cost of establishing EPZs.

    I think it may prove interesting to explore the potential synergies of including contributions to the domestic savings pool, either by corporations as a percentage of their total domestic transactions, or through other mechanisms such as pension or health insurance funds. If just a fraction of the cash used to buy Zambian inputs for exporters were to linger in the domestic savings pool for a few extra months before being expended, then the expansion of available capital in the banking system could be leveraged into SME development loans. This could potentially also feed back into the EPZ, improving efficiencies and costs for local inputs.

    ReplyDelete
  32. Export Processing Zone Bill assented to by Dr. Frederick "Chiluba in November 2001 is, thus, a welcome feature in our country’s quest for sustained socio-economic development. There is no doubt that the zones, earmarked for Ndola, Kabwe and Livingstone will create employment opportunities for our people, especially if the government will succeed in attracting enough foreign investments into the facilities" - Kyambalesa

    Slightly confused by this statement. Some clarification would help.

    Where do EPZs now sit relative to the Multi Facility Economic Zones that came into existance with the Zambia Development Act, 2007?

    ReplyDelete
  33. Cho,
    The Multi-Facility Economic Zones are a new initiative designed to replace the Export Processing Zone initiative. The new initiative is intended to establish special industrial zones for BOTH export-oriented and domestic-oriented industries, equipped with the necessary infrastructure for easy commencement and conduct of manufacturing activities.

    You might have already skimmed through articles like the ones below.

    ============

    China and Zambia:
    The all-weather friendship hits stormy weather
    Paul Hare, The Jamestown Foundation, China Brief
    4/26/2007

    Developmental Assistance and the Lure of Copper China and Zambia continued to enjoy a warm relationship in the years following independence, even when China’s fortunes dipped elsewhere on the continent during the Cultural Revolution. In addition to the massive Tazara railway project, China also built roads and a government complex in Lusaka. Another highly touted project was the Mulungushi textile plant established in the late 1970s, which became the biggest textile mill in the country, winning international awards for the quality of its products. In return, Zambia supported Beijing’s “One China” policy upon receiving its independence and co-sponsored the UN General Assembly resolution in 1971 to restore China’s seat on the Security Council.

    When Zambia achieved independence in 1964, it was the third largest copper producer in the world, exporting over 700,000 tons per year and ranked among the most prosperous countries in Africa. Almost 35 years later, however, production fell to a mere 228,000 tons and so did the overall state of the Zambian economy. Low copper prices in global commodities markets, minimal reinvestment in the mines and inefficiencies in the state-controlled enterprise that ran the copper mines all contributed to this precipitous economic decline. When the Zambian government began to privatize its state-controlled enterprises in the 1990s, what is now the state-owned China Non-Ferrous Metal Mining (Group) Co Ltd acquired ownership of the defunct and bankrupt Chambishi mine in north-central Zambia for $20 million in 1998 and began turning production around. The Chinese committed additional investments into the copper sector when they announced last November an investment of $200 million in a copper smelter to be located in the newly established Multi-Facility Economic Zone in Chambishi.

    Bloom Off the Rose

    Despite the long and well-entrenched history of friendship between China and Zambia, the relationship has recently encountered some rough waters. A growing tide of anti-Chinese sentiment surfaced during an unusual and highly volatile election at the end of September 2006, pitting incumbent President Levy Mwanawasa against the veteran, hard slugging opposition candidate, Michael Sata, also known as “King Cobra.” Mwanawasa had generally followed a program of economic reform and inducements to attract foreign investment during his first term. Sata, on the other hand, preached a populist message on the campaign trail laced with anti-Chinese references that resonated in the Copperbelt, where Chinese businessmen were accused of paying low wages and ignoring safety procedures. Contributing to the poisoned atmosphere among the miners were two tragic incidents—the death of 49 miners in an explosion at the Chambishi mine in 2005 and the shooting of several miners protesting low wages at the same mine in July 2006.

    The growing number of Chinese engaged as traders in the local markets or working in unskilled or semi-skilled positions posed another target for the opposition. Zambian traders complained that the Chinese were importing cheap goods and were driving them out of business. The textile industry was particularly affected, including, ironically, the famed Mulungushi textile factory that the Chinese had helped establish just decades before. Compounding the problem was the fact that that no one could offer an accurate estimate of the number of Chinese in the country. Deputy Minister of Home Affairs Chrispin Musosha told parliament that the 2,300 Chinese living and working in Zambia were expected to double in six months, but others sources claimed that as many as 80,000 Chinese were already residing within the country (UN Integrated Regional Information Networks, February 5). Dipak Patel, a former minister, warned the government: “We have a lot of Chinese traders selling in the market and displacing local people and causing a lot of friction. You have Chinese laborers here moving wheelbarrows. This needs to be dealt with because you’ll end up with a situation with what happened in Uganda with the Indians” (The Guardian, February 5).

    The electoral campaign heated up when Sata threatened to chase away the Chinese, Indians and Lebanese, if elected, saying they were “infestors” not “investors.” Local media also reported that he had met with Taiwanese businessmen in Malawi to get funding for his campaign and reportedly stated that he would recognize Taiwan as an independent country if he were elected. While Sata denied having received money from Taiwan, he was more ambivalent about his views on the relationship with Taiwan. The Chinese Ambassador to Zambia, Li Baodong, in an unusual departure from diplomatic protocol, responded by calling a press conference at the embassy where he challenged Sata to clarify his position on Taiwan. According to one news report, the ambassador threatened, “We shall have nothing to do with Zambia if Sata wins the elections and goes ahead to recognize Taiwan” (AFP, September 5, 2006). Li also reportedly added that the Chinese business community would halt additional investments until the bilateral relationship between the two countries was clarified. Mwanawasa quickly responded by stating that Sata’s comments were unfortunate and appealed to the Chinese to rescind their threat to pull out their investments in Zambia. While some commentators berated what they considered to be Sata’s disastrous foray in the international arena, others were incensed that China had poked its nose into the internal affairs of the country.

    Mwanawasa won the September 28 elections by a handsome margin, but Sata’s party, the Patriotic Front, performed well in the Copperbelt and in Lusaka, where the Chinese presence is most visible. In retrospect, the most notable feature of the campaign was the degree to which Chinese diplomacy became publicly enmeshed in the internal politics of an African country—an apparent contradiction to China’s stated policy of non-interference.

    Hu’s Recent Visit to Zambia

    President Hu spent two days in Zambia during his eight-nation trip to Africa in February, more time than in any other country. Some observers attached special significance to this fact, though it is likely that the length of the stopover was prompted more by logistical calculations than by any other considerations. The Chinese leader arrived with the promise of investing $800 million in the new Multi-Facility Economic Zone in Chambishi, the first such zone to be established in Africa. The zone is expected to attract both Chinese and Zambian investors and generate thousands of jobs. Other gifts included cancellations of debt; providing loans for road construction equipment; building a large sports stadium in Ndola, the Copperbelt’s largest city; establishing an agricultural technology center, two rural schools, a hospital and a malaria treatment center; and increasing the number of government-funded scholarships. If the purpose of Hu’s trip was to cement the bonds between the two governments and their leaders, these goals certainly appear to have been achieved, judging by the fulsome coverage given to the visit in their respective state-controlled media.

    Yet, the otherwise smooth fa├žade surrounding the visit cracked due to a number of notable incidents. Hu had intended to visit the Copperbelt to lay the cornerstone for the Ndola stadium and to commission the copper smelter in the new economic zone. Fear of protests by miners over poor working conditions, however, prompted the cancellation of his visit, which was prominently highlighted in the international media. Concerned with possible student protests, the police also sealed off all access roads to the University of Zambia on the day of Hu’s arrival. And, finally, there were the workers from the Mulungushi textile factory, who just days before, had staged a protest outside of the Chinese Embassy to complain about the loss of their jobs. The factory’s huge financial losses, stemming in part from its inability to compete with cheap Chinese textile imports, forced it to close temporarily.

    What Does the Future Hold?

    While it seems the Chinese are on the verge of taking over Zambia, starting with the rapacious Chinese companies that seem to be acquiring much of Zambia’s rich copper and cobalt resources, the reality of the situation is hardly the case. Vendanta Resources, an Indian-managed company registered in the UK, acquired the country’s leading copper producer (Kondola Copper Mines) in 2004. A Swiss company, Glencore International, operates the second-largest producer, Mopani Copper Mines. Other countries involved in copper and cobalt production include Canada, Australia, South Africa, the United States and the United Kingdom. Total copper production reportedly rose to about 427,000 metric tons in 2004, of which the Chinese share represented a little over 10 percent of the total [3].

    Likewise, while the Chinese role in Zambia continues to expand, a host of other actors also occupy influential positions. South Africa is Zambia’s biggest trading partner, but other African countries—Tanzania, Malawi and Zimbabwe—are also important partners. Moreover, the United States enjoys a good relationship with Zambia and provided some $268 million in assistance through bilateral and multilateral channels in 2006, making it the largest single donor in the country. In December 2005, the two governments signed an agreement canceling $280 million in bilateral debt [4]. A number of multilateral organizations are also involved in the country. The World Bank is the largest multilateral donor and the IMF conducts periodic economic reviews under a three-year Poverty Reduction and Growth Facility. This multitude of external actors, all with significant stakes in the country, serves as evidence that Zambia is unlikely to fall under the exclusive sphere of influence of any particular actor in the near future, including China.

    Furthermore, the ripples of anti-Chinese discontent that surfaced in Zambia’s election campaign and during Hu’s visit flowed from real grievances among the populace; echoes of these, albeit more muted, were also found in Hu’s subsequent travels to South Africa and Namibia. South Africa had previously felt the sting of Chinese textile exports crippling local industry and President Thabo Mbeki had warned just in December that Africa risked becoming an economic colony of China. While Hu received a warm welcome from South African President Mbeki in February, one major South African newspaper pointedly issued a strong critique of China’s human rights and labor records; a Namibian newspaper leveled similar criticisms (The Namibian, February 5).

    This is not to say that the Chinese position in Zambia and the southern African region is in peril. If one examines the September 2006 election results in Zambia, Michael Sata received 29% of the vote; Levy Mwanawasa and a third candidate, Hakainde Hichilema, shared the remainder of more than two-thirds of the vote. Thus, while the anti-Chinese sentiment is certainly troubling for Beijing, it is not immediately threatening toward China’s interests. What remains to be seen now is how China will deal with countries that have opposition parties and some degree of freedom of the press, and where labor unions and non-governmental activist groups can make life uncomfortable for those in powerful positions, both domestic and foreign. China can expect growing criticism from these groups if Chinese companies, such as the operators of the Chambishi mine, fail to address the legitimate grievances of their workers. Likewise, if small Chinese traders and unskilled workers continue to multiply and ply their wares and services in African markets, local resentment can be expected to grow, leading, as Dipak Patel warned, to ugly confrontations down the road.

    Notes

    1. The Tazara railroad was intended to bypass the use of transportation routes through apartheid South Africa. This was especially important for the export of Zambian copper. The Chinese government offered an interest free loan of about $500 million and work on the project was completed in 1976. On the downside, the Tazara locomotives were underpowered and had to be outfitted with GE engines; and, the roads did not wear well.
    2. It is perhaps telling that Sata went to Taiwan, while the Chinese President was visiting Zambia.
    3. “The Mineral Industry of Zambia,” United States Geological Survey, available online at: http://minerals.usgs.gov/minerals/pubs/country/2004/zamyb04.xls.
    4. “Background Note on Zambia,” United States Department of State, available online at: http://www.state.gov/r/pa/ei/bgn/2359.htm.

    ============================

    Zambia and China to spend R200m
    www.iol.co.za
    August 31 2007 at 07:47PM

    By Shapi Shacinda

    Lusaka - Zambia and China will invest $28-million (about R200-million) to supply power to Chinese firms which set up operations in the African country's mineral-rich Copper Belt region, a senior industry official said on Friday.

    Rhodnie Sisala, managing director of state power utility Zesco, said it would provide electricity to a new copper smelter the Chinese are building in the Chambishi multi-facility economic zone (MFEZ), 420 km north of the capital Lusaka.

    "The total cost of providing power supply is about $27.8-million. It is expected that the project will be completed by August 2008 to enable the smelter to commence copper processing," Sisala said in a statement.

    Investors from China will build leach and brick-making plants, and others to treat slag from the mines into finished copper. Expansion of the Chambishi copper mine, owned by China's NFC Africa, was also in the pipeline.

    The government said earlier this year that Chinese companies would also set up manufacturing plants and agricultural processing factories in the Chambishi MFEZ.

    Officials say China has pledged to invest $1.2-billion in two economic zones, including one for high-technology manufacturing firms in Lusaka. Of that investment, $900 million is earmarked for Chambishi.

    In July, Zambian President Levy Mwanawasa said he would fight political opponents trying to limit or frustrate Chinese investments in the mineral-rich southern African nation.

    The main opposition Patriotic Front (PF) party won parliamentary polls in the mineral-rich Copper Belt province, after its leader campaigned on an anti-China platform in 2006 presidential and parliamentary elections.

    Zambia became the first African country to experience riots over charges against Chinese firms of poor labour relations, poor safety standards and low wages paid to local miners.

    In 2005, 50 workers died at BIGRMM Zambia Ltd, a Chinese-run firm after an explosion which experts said was caused by poor safety standards.

    The state Environmental Council of Zambia (ECZ) granted BIGRMM a new licence in June to set up another plant despite resistance from families of the dead workers.

    Chambishi is one of five economic zones China plans to set up across Africa as Beijing strengthens its economic partnership with the continent, which has abundant natural resources and cheap labour.

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