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A Zambian Shenzhen or just another DA?
Reuters reports that Zambia & China are now on verge of signing a deal that would see fifty Chinese companies invest over $800 million in the Chambishi tax free economic zone within the next five years. According to Felix Mutati (Commerce Minister), in addition to removing tax restrictions, the Zambian government would also "build roads and set up telecommunications, and water facilities in the [multi - facility economic] zone".
Zambia of course is not the first nation to go down this route. China and India have been pursuing this policy of MFEZs for a long time. The successes of Shenzhen and Pudong (in Hong Kong and Shanghai respectively) are certainly worth noticing. Both have become huge urban agglomerations of concrete and steel, and both have generated huge amounts of cash. The Indian government has over 170 export processing zones and many more are in the pipeline. In both cases, the most debated issue has been about land and those displaced from it. Zambia of course is already facing problems in this area. See the blog here. But some would question whether MFEZs are value for money for the Zambian tax payer. We have to remember that MFEZs means zero direct revenue to government (beyond employment taxes and so forth), and of course in Zambia's case we are also planning to spend money on MFEZ related infrastructure, effectively going in the opposite direction of what MFEZs have been doing in other countries, where they provide the infrastructure (part of the reason other governments have supported MFEZs is because of precisely the reason that they deliver infrastructure). So there's a genuine question, which I think has not been debated among the Zambian analytical community, on just what Zambia will get for the tax breaks and infrastructure spend. We know the Chinese firms will get $900m per year in non taxable profits!
On the positive side, the benefits of MFEZs seem pretty obvious. In the words of Felix Mutati (Commerce Minister), "...the Chambishi zone, which should be fully functional within five years, would initially create 6,000 jobs and offer incentives such as tax relief and easing customs duties on imported equipment and machinery...We are looking for a cocktail of companies that will add value to our raw materials to use the Chambishi zone. China is helping to attract other foreign companies on our behalf" . The main benefits appear to be coordinated employment creation and diversification of the Zambian economy. Indeed beyond the Chambishi zone will be a host of firms providing services to those firms within the free tax zone (generating catalytic employment).
In terms of value for money, the real question is whether new economic activity generated by the Chambishi zone would more than compensate the government for revenue lost from tax-breaks and expenditure on new infrastructure. The economic analysis underpinning the Chambishi zone deal needs to be made available so that we can check whether this question has been addressed (we are still suffering from mining DAs). A key element of the analysis is the issue of what would happen if the tax - breaks and concessions are not made? Would Zambia get the investment anyway from other players? The government analysis presumably has also factored in the costs of displacement for those that have lost the land. What are these costs?
But of course there's an even more profound question that I hope those in opposition and think tanks (like ZIPPA, JCTR etc ) are thinking about - are MFEZs the right way to attract investment and can they really make any serious dent on poverty? It strikes me that we have moved from abandoning development agreements on the mines (with their zero taxes!) to creating new ones with the economic zones. My inclination is that Zambia needs policies that introduces a bureaucratic hands-off approach, the freedom to invest across sectors, and promote contestable markets (with import competition, and privately financed infrastructure being two of the key factors - see the blog here). This is the only way to ensure that investment reaches every province and district in Zambia and ensures that we tackle rural poverty.
50 comments:
good looking out, brother. interesting read. will return to add my bit to this issue...
Doesn't strike me as the smartest idea. Not so much because of the loss of tax revenue, that could be compensated by the spill-overs through jobs, growth etc.. It's just that i don't see how this would introduce additional activity and not just make the already established companies move. I don't quite have the right vocabulary but I thought successful MFEZ were about segmentation (of labour markets, of sectors) and export orientation. How in any way, anyone would think that Chambishi should become Shanghai ?
btw.. have you read Dani Rodrik's latest book ?
Random,
"It's just that i don't see how this would introduce additional activity and not just make the already established companies move"
I can't see it either!
The only reason I can think of is the question of..."speed of investment". The government would probably say, against the counterfactual, MFEZs allow much quicker, and dare I say, better planned investment. So probably the only benefit is that Zambia gets this investment quicker rather generating additional activity (over time) per se.
But then again, if the main benefit is moving the investment forward in time, then it begs the question whether that benefit sufficiently outweighs the infrastructure and tax break costs of making it happen.
The other question of course is whether this sort of investment attracts the "wrong" bunch. A point normally made is that measures that improves transparency and reduces the costs of doing business, makes sure the best of the best investors rise above others. with deals of this kind, yes you get a viable MFEZ, but will these companies be ethical?
"btw.. have you read Dani Rodrik's latest book ?"
Its on my "easter" reading list!! Have you read it yet? He was offering the book for free last time I checked his blog... I am currently reading Martin Meredith's incredible book on South Africa (1870 - 1910)...A must read if you like a mixture african economic and political history.
According to Felix Mutati (Commerce Minister), in addition to removing tax restrictions, the Zambian government would also "build roads and set up telecommunications, and water facilities in the [multi - facility economic] zone".
Which completely misses the point of these 'development zones'.
Does the MMD have any way other than completely rolling over when it comes to 'foreign investment'?
Anyway, check out this anti-globalisation book:
Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (Hardcover)
by Ha-Joon Chang (Author)
He gives a long description on the development of South Korea, and it has very little to do with throwing open the country's borders to western made goods. It has surprisingly much to do with good old fashioned protectionism.
i don't know if i'd call Ha-Joon Chang's book "anti-globalization". I mean sure it goes against the idea that Korea has ever been any sort of "hands-off" free-trade paradise but it wasn't good old fashioned protectionism either, was it ?
I haven't finished Rodrik's book yet. Somehow it has been competing for my brain time with Ken MacLeod's "Fall Revolutions" series, lol. But it's good. Really good. I remember when he offered it for free to people from develloping nations but I didnt make the deadline (or may be i didnt feel like sending that email).
I'll check Meredith's book, even if South Africa sort of bores me. Too much of an outlier, may be ?
but back to the MFEZ,
I also have a geographic concern. Which kind of companies do they think would move to the Copperbelt ? to produce what ? I mean, can a tax-break compensate for a rather small market or the transportation costs ? Will say textile companies or iron smelter operating in Bangladesh or Morocco move ?
My gut feeling is that they won't. So it seems that that MFEZ attract investment in high-marging activities that would have happened anyway except that the tax revenue would be lost.
And with the mining law thing, I seriously doubt the investors who are more bothered by unpredicability than by nominal tax rates would change their mind (and i believe there's a LOT of those).
And, the Copperbelt ? Unless they're bracing themselves for lots of internal migration, my feeling is that it's not the cheapest labour in Zambia, is it ?
I mean sure it goes against the idea that Korea has ever been any sort of "hands-off" free-trade paradise but it wasn't good old fashioned protectionism either, was it ?
Yes it was. It was protectionism taken to the n-th degree, following the Japanese example.
They created Chaebol, many of which are still with us, like LG (Lucky Goldstar) or Daewoo.
These corporations were given massive government support, and if they didn't comply to the government's wishes, they had their electricity or water cut off.
Korea never sought foreign or western corporations to come and manufacture cars or VCR's in Korea. They only exported them.
Check out the book.
My gut feeling is that they won't. So it seems that that MFEZ attract investment in high-marging activities that would have happened anyway except that the tax revenue would be lost.
What should be happening, is a vertical integration of industries. For instance, istead of exporting gemstones, export jewelry. Instead of just having a mining company, have a mining company, a jeweller, a fashion design house, all manufacturing finished goods. Such an approach would maximize local jobs, maximize retention of value added, etc.
Fascinating discussion - thanks for the blog Cho. My main contribution would be to add that the zone may well bring jobs, but what kind of jobs? What wages, how secure, under what labour rights regime? The Copperbelt may not have the cheapest wages in Zambia, but, erm, if we're looking to benefit the country, is that our worry?
The current Zambian labour legislation has been slated for a rewrite for decades and promotes chaos in labour relations with disastrous outcomes for companies and workers (see the current mess at Chambishi). Well, disastrous for companies? I suppose it depends - is it better for the bottom line to have to pay low wages and refuse the right to organise, but have to spend on security, put up with strikes, a sick and dying workforce, be in constant negotiations and public relations drives, have to occassionally re-built burned out/vandalised plant? Or to pay properly and develop the workforce and the area as well? One model would be a securitized MEFZ, with riot police keeping workers in line and protecting barbed wire compounds and management from a resentful workforce. It's not one I think would last long or get the government re-elected. Any failure to extract promises that investors would pay their own way in terms of infrastructure is also worrying. Transparency in the contracts signed with investors is absolutely key in this regard.
On the question of where the inspiration comes from, I have just read a PhD submitted last year by a senior Zambian civil servant running the Government planning process. He is clearly enamoured with the East Asian export-led growth model, with major state support for selected industries. I make no comment on whether it's the way forward, but there is clearly interest in that idea amongst senior Zambian policy makers.
Alastair
On the question of where the inspiration comes from, I have just read a PhD submitted last year by a senior Zambian civil servant running the Government planning process. He is clearly enamoured with the East Asian export-led growth model, with major state support for selected industries.
That's great. The sooner people turn away from neoliberalism the better.
If only policy makers looked to build up their economies, the way the Asian economies were actually built, instead of the neoliberal rewriting of it, economic development would be a certainty.
Has he published his thesis?
Mr K,
Export-driven economies cannot be anti-globalization, period. What Korea did was to shelter certain sectors and reward export firms.
That to me is a bit more subtle than old fashined protectionism.
On the other hand, I don't understand the focus on final consumer products. In a world where division of labour reached incredible levels and products get more and more complex, there is a bunch of options. Think about how China started with final assembly of cars and moved its way up to car parts using protectionist incentives.
That said there is no such thing as The Asian Model. Japan and Korea are very similar but Singapore and HK or Indonesia or Malaysia or Taiwan each had slightly different models.
The trick is always to have the right incentives.
The Copperbelt may not have the cheapest wages in Zambia, but, erm, if we're looking to benefit the country, is that our worry?
Yes it is if what you want is not just existing companies moving to your free trade zone. And it also matters if you want to protect the existing jobs. Furthermore, there is a "fairness" issue as other regions may use a boost in activity (and wages). I don't see how inflating wages where they're already high benefits the country.
Random African,
Export-driven economies cannot be anti-globalization, period.
Yes they can be and are. It all depends on how you interpret globalisation.
Neoliberalism basically interprets it as corporatisation.
On the other hand, I don't understand the focus on final consumer products. In a world where division of labour reached incredible levels and products get more and more complex, there is a bunch of options. Think about how China started with final assembly of cars and moved its way up to car parts using protectionist incentives.
Because the basic economic reality doesn't change.
All along the economic process, finacial value is added to the product. Globally, it may not matter where in the world business processes take place, but locally it makes a huge difference.
NAFTA has destroyed maize farmers in Mexico, with cheap, massively subsidized maize from agrobusinesses in the US. The result is urbanisation in Mexico, and for the United States, increased illegal immigration into the United States from Mexico.
In Jamaica, the unfettered imporation of foodstuffs has undermined local food production. As a result, there are fewer jobs, and more people are moved out of the countryside and into the cities and abroad.
It makes an enormous difference whether goods are turned into finished goods locally, because it creates a local economy, with local employees having increased purchasing power.
That said there is no such thing as The Asian Model. Japan and Korea are very similar but Singapore and HK or Indonesia or Malaysia or Taiwan each had slightly different models.
Which is why neoliberals always point to city states like Hong Kong and Singapore. However, Japan, Korea, China, India, even Taiwan have much more nationalist economic policies, with lots of protections for local production.
The barriers to breaking into the Japanese economy are huge, right down from language barriers to national legislation that puts all kinds restrictions on how and with who you can do business in Japan. Suppliers are usually bound to a Japanese buyer, often one of the Keiretsu. You have to partner with a Japanese national. You're paying punitive taxes, all to protect local production.
Random African,
Furthermore, there is a "fairness" issue as other regions may use a boost in activity (and wages). I don't see how inflating wages where they're already high benefits the country.
Commercial companies are legally bound to maximize profits for their owners/shareholders. So the less they pay in costs, including wages, the better they are doing their job.
However, what about a new form of business, that instead of paying out profits to shareholders, pays out profits as salaries? (They could retain some profits to compensate for asset depreciation and purchasing capital goods.)
That would do several things. It would give workers real living wages. It would put money in their pockets which they would spend beyond food and heating, on consumer goods, creating a consumer market in the process.
Or just, if job creation is the purpose of these free trade zones, set the mininum wage really high, to achieve the same effect.
Commercial companies are legally bound to maximize profits for their owners/shareholders. So the less they pay in costs, including wages, the better they are doing their job.
wages, taxes, transportation costs, input costs, training costs, the process itself.. there are lots of ways to reduce costs.. And maximizing profits can also mean improving output, maximizing added value, improving productivity etc..
Profits to employees ? hmmm.. Unless you're aiming for the World Revolution and give no other option to capital, i don't see why cooperatives would be succesful now.
Or just, if job creation is the purpose of these free trade zones, set the mininum wage really high, to achieve the same effect.
NO !
Gosh haven't we learned anything from the 70's ?
Remember what effect high wages in mining and public service had on the rest of the economy ? It drove workers in the informal economy and boosted imports by raising costs for local producers !
Neoliberalism basically interprets it as corporatisation.
How so ?
How are export-driven economies not profiting from globalization ? Someone has to import them, right ?
The truth is that the picture IS complicated and using a straw-man neo-liberal boogey man is not very useful. Sure NAFTA have effects on the Maize economy but protectionism didn't help PEMEX much. And the Mexicans moving north, to the cities or to the US are making a better living than they were in their farms.
The thing is, if you want more jobs, you want people to get into the formal economy, you want wages to rise, I don't see why you wouldn't more investment, more companies moving in (or being created). I don't see how having a high minimum wage or limits on who can invest or focusing on consumer goods instead of say intermediary goods and services would help achieve that.
On the consumer goods obsession, Korea didn't take off because they made TVs and cars. Korea took off by making steel and boats and heavy industry stuff. I mean there's a LOT of added value processes between minerals and final products !
wages, taxes, transportation costs, input costs, training costs, the process itself.. there are lots of ways to reduce costs.. And maximizing profits can also mean improving output, maximizing added value, improving productivity etc..
I know. However, I was specifically talking about wages.
Profits to employees ? hmmm.. Unless you're aiming for the World Revolution and give no other option to capital, i don't see why cooperatives would be succesful now.
I'm not even necessarily talking about cooperatives.
I am talking about a new form of company, that pays out most of it's profits as wages.
For the specific purpose of creating a market for consumer products by having high wages.
- Or just, if job creation is the purpose of these free trade zones, set the mininum wage really high, to achieve the same effect.
NO !
Gosh haven't we learned anything from the 70's ?
Remember what effect high wages in mining and public service had on the rest of the economy ? It drove workers in the informal economy and boosted imports by raising costs for local producers !
High wages drove workers into the informal economy?
I am not talking about inflation. I am talking about cutting out the shareholders, and putting real, hard currency backed by produced goods and services or foreign currency into the economy.
There may be a temporary inflationary effect until production in the rest of the economy catches up, but that in itself will stimulate production, and that has nothing to do with what happened in the 1970s. Back in the 1970s, there was an oil crisis, followed by a worldwide recession.
High wages will simply lead to increased buying power and new consumers.
So please tell me what happened in the 1970s with regards to high wages in mining - and I'm not talking about the public service, because that is basically a neccessity and cost to the government/state, especially if the central government is rather bloated to begin with.
- Neoliberalism basically interprets it as corporatisation.
How so? How are export-driven economies not profiting from globalization? Someone has to import them, right ?
It all depends who benefits. In the case of Zambia, exports of raw materials have not benefited the economy in any significant way, because all the profits stay with the corporations.
In the case of Jamaica, throwing open borders for exporters of agribusiness products in the US only benefits the agribusinesses in the US, while destroying local producers.
See Life And Debt.
The thing is, if you want more jobs, you want people to get into the formal economy, you want wages to rise, I don't see why you wouldn't more investment, more companies moving in (or being created). I don't see how having a high minimum wage or limits on who can invest or focusing on consumer goods instead of say intermediary goods and services would help achieve that.
Seeing to it that more companies are created is a different matter. It has to do with legislation, (de-) regulation, and creating the hard and soft (financial, marketing) infrastructure that ordinary companies need to operate.
What it has meant so far, is giving massive, competition falsifying advantages to foreign corporations. And that is the theme worldwide (see the Life And Debt documentary). This is what is really driving entrepreneurs into the informal economy.
High taxes for Zambian businesses, indefinite tax deferrals and 'free trade zones' for foreign companies. That alone would be enough to deter official businesses.
What the government needs to do is to create a supportive environment for local businesses.
On the consumer goods obsession, Korea didn't take off because they made TVs and cars. Korea took off by making steel and boats and heavy industry stuff. I mean there's a LOT of added value processes between minerals and final products !
You mean they didn't ask US Steel to do the job for them?
And I used consumer electronics as an example, because they
And what is this new thing called 'globalisation', anyway? There were ancient trade networks that stretched all the way to Korea. So what is new? The whole 'globalisation' theme is about making the world a smooth place to trade in for western corporations.
Instead, we should be looking at the global economy as an exention of the local and regional markets and economies. If something cannot be produced locally, or of local markets are saturated, then exports should occur. But first and foremost, local and regional markets must be developed. And protected. It also reduces the carbon footprint of products, when they aren't shipped all the way around the world and back.
On the consumer goods obsession, Korea didn't take off because they made TVs and cars. Korea took off by making steel and boats and heavy industry stuff. I mean there's a LOT of added value processes between minerals and final products !
And they didn't get US Steel to do the job for them. I use consumer electronics as an example, because electronics with Keiretsu and Chaebol names (like LG, Daewoo, Toshiba, Honda, etc.) are so readily available.
Random African,
I'm still waiting. What happened in the 1970s that was caused by the terrible phenomenon of high wages?
Also...
Just a note on the not so helpful link that was added to my use of the phrase "carbon footprint".
1) I actually mean that. I think that it is important that we don't unnecessarily add to the wastage of energy, and ship products all over the world and back, the way for instance cod is shipped from Russia to China and then to the UK. The more production can be performed locally, the more money is retained locally, the shorter the distance the product has to travel and the better it is for the environment.
2) I am sure subsidies will be made available or other preferential treatment can be given to 'green' products. That means that funds can be tapped into for projects that are ecologically sound.
3) On the whole, 'green' products catch a higher price than non-green products. People are willing to pay extra for their health.
If you don't believe money can be made from clean energy, check out:
Apollo's Fire: Igniting America's Clean Energy Economy, by Jay Inslee
Cho,
I'm asking you, because you're the development economist and Random African isn't replying (at least so far) to his own claim.
What was the terrible thing that happened in the 1970s, and how was it the result of high wages?
Because I still don't know what Random African was hinting at.
Just a quote:
"Servers, labourers, and workmen of different kinds make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged."
- Adam Smith
Something the neoliberals have rejected, with their emphasis on the business elite.
MrK,
"Cho, I'm asking you, because you're the development economist and Random African isn't replying (at least so far) to his own claim.
What was the terrible thing that happened in the 1970s, and how was it the result of high wages? "
I've lost track here! lol!
Are you referring to the high oil prices of the 70s?
To quote Random African:
" NO !
Gosh haven't we learned anything from the 70's ?
Remember what effect high wages in mining and public service had on the rest of the economy ? "
I'm puzzled as to what the detrimental effects of high wages on the economy were in the 1970s.
sorry Mr K, I didn't noticed you replied until today.
On high wages in the 70's, I don't see why you'd exclude public service jobs. After all, they are jobs and have an effect on the rest of the economy. (after all, employers compete too)
In sort, the demand-side policies failed. The higher wages raised the cost of domestic products as it raised the demand for product and as a result, it was imports that satisfied that demand. And yes, inflation followed. And the manufacturing sector didn't take off except for a few high protected (and inefficient) firms. Agriculture too was affected as the high wages (and the biased public spending) drove the rural exodus and made the imported foodstuff competitive. And since mining and public services jobs were unlimited, the agricultural and manufacturing jobs that weren't created or dissapeared were replaced by informal service jobs in the cities.
And, well, no. The oil crisis is a weak excuse. First, Korea for instance kept high growth rates during the 70's. And Zambia's Per Capita GDP peaked in 1965, stagnated until 1976 and then plunged.
How do you explain the pre-1973 stagnation ?
see
Gap Minder Link
It all depends who benefits. In the case of Zambia, exports of raw materials have not benefited the economy in any significant way, because all the profits stay with the corporations.
So the jobs created, the tax revenue generated, the spill-over growth in transport, services and all that don't exist because Evil Foreign Corporations Make Profits !
That's silly.
And as far as cutting out the shareholder, well, hmm, there is still an issue with capital. I mean, you still need someone to invest and while you propose to compensate them for asset depreciation and purchasing capital goods, you don't explain why anyone will be willing to invest. After all, they can put their money in a place or an activity that will yield better dividends.
Anyway, I hate having to defend what you call "neo-liberalism". I actually believe they do get a lot of things wrong but somehow they managed to get attacked on what they get right. Which is sad because then I have to defend them.
Random African,
On high wages in the 70's, I don't see why you'd exclude public service jobs. After all, they are jobs and have an effect on the rest of the economy. (after all, employers compete too)
Because however useful they may be, they do not represent a direct trade-off of cash for supplied goods and services in the market place.
Public service jobs at best can deliver goods and services the way the commercial sector does. However, if you add a bloated state with 29 ministries, and spend virtually all money at the ministerial level, that is very doubtful.
On the other hand, if a person grows flowers and sells them at market value, there is a direct relationship between the money earned and the service and goods delivered. The same cannot be said for all civil service, hence such jobs and salaries may be inflationary.
In sort, the demand-side policies failed.
I completely disagree with the blanket condemnation of a policy that lifted the United States out of the Great Depression, and created the American middle class.
The higher wages raised the cost of domestic products as it raised the demand for product and as a result, it was imports that satisfied that demand.
Then you are talking about the artificial lifting of wages, without a reciprocal amount of goods and services delivered, and of course that is inflationary.
As you read my post again, I am talking about something completely different. What I am talking about, is the creation of real goods and services, in exchange for government wages, and wages earned from the creation of real goods and services in the market place.
I'll give three examples.
1) Much of the infrastructure of the country is in a state of bad wear and disrepair. If the goverment stepped in, and paid a person $5,- per day to help restore local roads, dig swales, dams and dikes for water management, that would represent real goods delivered, that have a real economic value to businesses and the government itself. The government would be spending money, but it would have to spend much less on food relief, repair of roads and bridges because of flooding, etc. In fact because of increased commerce, it would earn more in taxation in the long run.
2) If the government made funds available for small business, many people could be lifted out of official unemployment. Eventually, they would earn enough to pay taxes, and return the money they received from the government many times over. This again would make such spending non-inflationary in the long run. The government puts money in, but through higher returns from taxation, it would receive it back too.
3) Legislation. It would cost the government very little to repeal all the legislation that is necessary to set up a small business. Make it very simple to set up an official business for ordinary Zambians, not just foreign investors. Reduce the number of licenses that are required, for instance by having a single national register, that would allow a company to do business in any zone that is designated as a commercial zone by a local council (barring of course dangerous materials). Don't tax businesses making under $200,000 per year, and reduce or eliminate income tax for any Zambian business. Considering the tiny number of official businesses compared to the people officially unemployed, they have nothing to lose financially.
Within such a context, higher wages that are earned in the market place are not at all inflationary.
As long as there is a tradeoff between the cash earned, and the delivery of real goods and services, there can be no inflation from higher wages. Just wealth creation and accumulation.
There has to be a responsiveness by the market place to higher prices, in other words, higher prices should be followed by higher production, until the goods delivered and prices balance eachother out.
And of course, that too would be positive for the economy, because higher prices would stimulate production, which would increase the number of jobs, and incomes.
As long as there is nothing hampering increased production, higher prices from higher wages are a good thing.
So the jobs created, the tax revenue generated, the spill-over growth in transport, services and all that don't exist because Evil Foreign Corporations Make Profits ! That's silly.
That is silly, because it is not true, nor is it the argument I made.
There was, until the replacement of the Development Agreements by the new mining laws, no measurable benefit to government from taxes of the mines, as I'm sure you are aware of.
I think they collected a total of $6 million in taxes from a $4000 million industry.
And yes, that was because all the profits did go to the mining companies, whether they were evil or just callous and obsessed with profits is irrelevant to that.
The jobs created were of a terrible standard as part of the mining agreements, labour standards were not enforced, and the companies indemnified from responsibility for pollution or 'accidents'.
And as far as cutting out the shareholder, well, hmm, there is still an issue with capital. I mean, you still need someone to invest and while you propose to compensate them for asset depreciation and purchasing capital goods, you don't explain why anyone will be willing to invest. After all, they can put their money in a place or an activity that will yield better dividends.
You can always withhold some capital for future capital spending. Or, invest in an industry with low overhead, where most of the costs are labour. And pay out as wages/bonuses anything that isn't spent.
Remember that the mininum wage in the west is about $5,- per hour, depending on the country. Anything just below that in an industry where most of the costs are labour, will result in competitively priced goods.
$6 million in taxes and terrible jobs are still better than no tax revenue and no job at all. And I see you're not touching the spill-over.
I completely disagree with the blanket condemnation of a policy that lifted the United States out of the Great Depression, and created the American middle class.
I'm not condemning every demand-side policy ever made. I'm just saying that the particular demand-side policies enacted by Zambia and a bunch of other african countries were failures.
Furthermore, it is odd to compare the great depression and its particular set of problems (mainly, over used capacity) to Zambia. Boosting an existing engine is not the same thing as building an engine.
As you read my post again, I am talking about something completely different. What I am talking about, is the creation of real goods and services, in exchange for government wages, and wages earned from the creation of real goods and services in the market place.
errr. My initial reaction was to "Or just, if job creation is the purpose of these free trade zones, set the mininum wage really high, to achieve the same effect."
How is setting the minimum wage real high not an artificial lifting of wages, without a reciprocal amount of goods and services delivered ?
I mean, wages get higher as productivity or demand for labour increases. There is nothing undesirable about that in my book.
However that's a far cry for setting a "high" minimum wage.
Remember that the mininum wage in the west is about $5,- per hour, depending on the country. Anything just below that in an industry where most of the costs are labour, will result in competitively priced goods.
Do you teleport goods ? Does the whole world have the same productivity ? Is there any reason to think that Zambian workers compete with German and Dutch workers and not with Chinese and Egyptian ones ?
And realistically, in which industry are most of the costs labour ?
You still don't adress why anyone would invest their capital in a place where most of the profits go to employees when they'll get more in other places.
$6 million in taxes and terrible jobs are still better than no tax revenue and no job at all. And I see you're not touching the spill-over.
Oh please, those were bad deals. Everyone acknowleges that they were bad deals, even the government.
And it is also insulting, because it implies there was no other business model possible, or that Zambians cannot mine their own minerals themselves.
How is setting the minimum wage real high not an artificial lifting of wages, without a reciprocal amount of goods and services delivered ?
Because the salaries still come out of the same profits.
As a result, there is no inflationary effect.
It would be as if these individuals were working for themselves. If you work for yourself, you keep 100% of the profits. There is no inflationary effect.
There is only an inflationary effect, if the wages are greater than profits, for instance with the help of subsidies.
This is what it boils down to. Inflation is an imbalance between the goods and services on the one hand, and the amount of money (in whatever form) that is present in the economy.
As long as cash that enters the economy is earned from real goods and services, and there is no constraint on production to keep up with rising prices, there is no inflationary effect. Not even if products that cannot be locally produced are imported.
I mean, wages get higher as productivity or demand for labour increases.
That presumes there are no other constraints on the availability of labour. And wages actually fall or disappear if 'productivity' increases through outsourcing (i.e., moving factories to low wage countries, in the case of the US).
There is nothing undesirable about that in my book.
However that's a far cry for setting a "high" minimum wage.
I'll give you a practical example.
A miner in a gold mine earns his company $17,50 per hour. (That would be total profits, divided by the total number of hours worked for all miners).
So the company makes $17,50 per miner per hour. They however pay the miner $1,00 per hour.
Now the potential of raising wages without raising inflation is $16,50. (If the mine owners live within the country and spend every cent inside the country, there is no inflationary effect at all.)
The only difference is that $17,50 ends up in the pockets of the miner, instead of the pockets of shareholders.
And I'm using this example purely with regards to inflation, I'm not talking about setting money aside for asset depreciation and the like.
The only question is - is the money that is entering the economy representative of the same amount of goods and services being delivered.
That's the difference between inflation and non-inflation.
And that is also why having such a bloated government is inflationary. So the biggest thing to do about inflation is not to keep wages low, but to eliminate waste. Now the government have done that by proxy, by reducing government spending, and this has absolutely brought down inflation. The problem is that they did it by reducing spending on services (education, healthcare), instead of reducing inefficiency.
What they should have done, was reduce government waste instead, but that is much more of a political hot potato, because we're talking about a reduction of the actual size of government. Right now, there are about 29 government ministries, including 9 provincial ministries. There is a lot of duplication of tasks, and there is virtually no fiscal transfer to local government. There is also still very little oversight of government projects (although that seems to be changing a little, which is a start).
What is inflationary, is all these government projects that remain unfinished, lack of tracking the performance of contractors, etc.
And realistically, in which industry are most of the costs labour?
In industries where production depends mainly on manual labour. In other words, the production of goods that cannot easily be done by machine. And where overhead costs are minimal. For instance, because land is communally owned, and for agricultural products where input requirements are minimal?
you said in the case of Zambia, exports of raw materials have not benefited the economy in any significant way . and that's what i disagreed with. While you're free to argue that better deals could be made, more fiscal revenue, better jobs, that's different from arguing that mining has not benefitted the economy.
I mean, economy and government finances are not the same thing. Can we agree on that ?
And as for me being insulting, oh please. Mining companies and miners mine, not nations.
And wages actually fall or disappear if 'productivity' increases through outsourcing (i.e., moving factories to low wage countries, in the case of the US).
huh ? the increased productivity of US workers is making their wages fall ? Is that what you're saying ?
In industries where production depends mainly on manual labour. In other words, the production of goods that cannot easily be done by machine. And where overhead costs are minimal. For instance, because land is communally owned, and for agricultural products where input requirements are minimal?
No product is done by machine. Production is done with machines. Even marxists understand that !
Agricultural products that don't use tractors, irrigation systems, trucks, fuel, agronomical research, seeds, pesticides, fertilizer, storage facilities and computers to manage all that ? Hmmm.. I still don't see it.
As far as the inflation stuff, I'm honestly confused.
Are you saying that raising the minimum wage won't cause inflation because it won't raise the cost of production because profits will be eliminated ? Or did I completly misunderstand it ?
Well if that's the case, there's always that funny question about where one finds people willing to invest their money in capital that will yield no profit.
Random African,
And wages actually fall or disappear if 'productivity' increases through outsourcing (i.e., moving factories to low wage countries, in the case of the US).?
huh ? the increased productivity of US workers is making their wages fall ? Is that what you're saying ?
The increased productivity the companies is possible through the reduction in wages of US workers, by shifting manufacturing jobs to low wage countries.
Many people can't make ends meet on a single job anymore, so they have two or more. And people who used to get by with one job and still do, are a lot poorer.
The increased production still shows up in the company's books, but it no longer has anything to do with the American worker. At least in manufacturing, but also in outsourcing and similar industries.
As far as the inflation stuff, I'm honestly confused. Are you saying that raising the minimum wage won't cause inflation because it won't raise the cost of production because profits will be eliminated ? Or did I completly misunderstand it ?
Yes and yes. I am saying that shifting any part of the profits that are paid out as dividends (for instance) to salaries will not cause inflation. Just as paying out more profits as dividends will not cause inflation.
Well if that's the case, there's always that funny question about where one finds people willing to invest their money in capital that will yield no profit.
Government. It benefits in the long term, from increased tax revenues. So it benefits from taxation, instead of interest. Which is like receiving greater and greater interest from a loan that will never be paid back.
Or, social investors. There are plenty of non-profits out there. There are plenty of people who can invest in projects that yeild no financial return, as part of for instance tax breaks, etc.
The increased productivity the companies is possible through the reduction in wages of US workers, by shifting manufacturing jobs to low wage countries.
Many people can't make ends meet on a single job anymore, so they have two or more. And people who used to get by with one job and still do, are a lot poorer.
The increased production still shows up in the company's books, but it no longer has anything to do with the American worker. At least in manufacturing, but also in outsourcing and similar industries.
I don't buy that. Well, not totally. So I'll stick with Krugman's theories on social policy and may be the very very recent increased sophistication of chinese production.
Government. It benefits in the long term, from increased tax revenues. So it benefits from taxation, instead of interest. Which is like receiving greater and greater interest from a loan that will never be paid back.
Yeah, pull out the money printers !
Or, social investors. There are plenty of non-profits out there. There are plenty of people who can invest in projects that yeild no financial return, as part of for instance tax breaks, etc.
Hmmm... Whoever created the term "social investor" needs to be dropped on a water-less desert island in the Pacific Ocean or something.
People who can invest in projects that yield no return are called philantropists. And they usually "invest" in museums, conservatories and universities, not factories, farms and mines.
Anyway, I'll stop here because I feel like I'm getting frustrated and uncivil.
Well 'printing' money is what the government does - or at least what the Federal Reserve does, since the US went off the gold standard.
The only question is - does the new money generate more money.
Usually badly run governments print money to pay there bill - that is bad. Companies that are in trouble try to do the same thing - they can't pay their bills so they try to get a loan. They borrow from Peter to pay Paul, so to speak.
However, this is completely different than borrowing (or lending) to expand either their operations and turnover (in the case of a company) or to expand their tax base, in the case of a government.
The latter is what investment actually is - the borrowing of money to expand operations.
If on the one hand the government is lean and efficient, and on the other hand it lends money to directly stimulate economic activity - that is what development is actually about. And that money will return to the government many times over in the form of future taxation.
As we have seen, there is no point to just having low inflation. In fact, this government achieved low inflation, by punishing the population and reducing social services. At the same time, they have not reduced the machinery of government and the state by a significant amount.
There are still 29 ministries, there are still too many embassies, there is still too much duplication of functions by the state.
Those are all inflationary, as well as a waste of taxpayer money.
Inflation is all about the balance between the money that is floating around the economy, versus the goods and services that are produced.
Earned money can never be inflationary.
And that money will return to the government many times over in the form of future taxation.it lends money to directly stimulate economic activity - that is what development is actually about. And that money will return to the government many times over in the form of future taxation.
"could'. The money "could" return many times in the form of taxation. There's no guarantee it will. It could be spent onto finance real estate in London for croonies too.
The interesting issue of course who decides how and where money is invested. We're talking about government directly providing capital for companies that have no profit structure, only wages, right ?
Well, who plays the function of the entrepreneur ? Who discovers opportunities, who constantly improves the production process ? And what incentives does that entity or person have to do that?
How does the government-lender decide which firm-cooperative (that's really what it is, whever you like the word or not) will in the long run generate the biggest wages and the biggest tax revenue. What incentive whoever makes that decision has to evaluate ir properly ?
In short, how is all that different from the glorious state-owned and operated companies ? And why yours would be more successful ?
(this would all be a different story if we were talking about investment in physical infrastructure and human capital but then again, even that has that odd tendency to not yield the results expected)
Inflation is all about the balance between the money that is floating around the economy, versus the goods and services that are produced. Earned money can never be inflationary.
I don't understand this... at all.
Inflation is about prices. An increased demand created by spending generates inflation (which isn't bad at all in moderate levels).
The relevance of "earned money" totally excapes me. Demand-shocks (which i what i think you're proposing) don't have anything to do with what's earned. The goal is to generate growth. This is what
Keynes had to say about it:
"Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.
It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly “wasteful” forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict “business” principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."
So in short, as long as the spending is equal, I don't see why paying a minister who will build a house, buy a car, buy clothes, eat in restaurants, and spend his money in various way is supposed to generate less demand or more inflation than paying teachers or doctors who will do exactly the same thing or even giving it to workers (through investment in cooperatives or by hiring them to build roads).
I personally think that talking about the size of the cabinet is a populist fallacy (usually followed by the size and utility of the parliament). It's for the most part fiscally irrelevant and while it often generates waste, it's in quality, not quantity.
In general, well, I think I told you that before about your manifesto: you're as naive and optimistic about it than you're cynical and pessimistic about what you call "neo-liberal" projects. But see, at least the neo-liberals can recognize weaknesses in theirs, even if they brush them off with moral arguments while in your manifesto politicians all of sudden become non-corrupt, investments aren't wasted just because they can't be, government fiscal ressources are unlimited and incentives never matter.
"could'. The money "could" return many times in the form of taxation. There's no guarantee it will.
Which is why it is called investment. There are no guarantees, just probabilities.
It could be spent onto finance real estate in London for croonies too.
Not if the money is properly monitored. Which can be done, by the way. Investment banks, investment funds do that all the time.
The biggest thing that keeps the poor poor, is suspicion. It keeps them from grabbing their opportunities and maxing out on whatever opportunities are presented to them. :)
The government can do a lot to reduce risk in both their own lending and in investments made by the Zambian public. There should be a registry of companies, a credit registry (which I think was just created), companies themselves could be rated with regards to credit risk, return on capital, dividends paid out to shareholders, etc.
All of which would either reduce risk, or make risk more transparant.
The interesting issue of course who decides how and where money is invested. We're talking about government directly providing capital for companies that have no profit structure, only wages, right ?
Ironically, that is very close to the business model they apply to Foreign Direct Investment.
The government receives no share of the profits, they do not collect income tax, and they only depend on income from Pay As You Earn, which is the income tax payed by workers.
An independent state agency could make such investments.
And if this government is serious about investment, they should provide a lot more transparancy in their own dealings. Instead of trying to catch the big fish, the government could give more powers to the PAC, and similar committees, set up national registries, give more powers to comptrollers, etc.
Well, who plays the function of the entrepreneur ? Who discovers opportunities, who constantly improves the production process ? And what incentives does that entity or person have to do that?
Bonuses, a small share of the profits (for instance, 10%), etc. There are lots of ways to create incentives for efficiency or profitability.
How does the government-lender decide which firm-cooperative (that's really what it is, whever you like the word or not) will in the long run generate the biggest wages and the biggest tax revenue.
They're not really cooperatives. The workers have no say in the management of the company. They aren't shareholders, they just receive the profits as salaries.
It should be obvious from their results who generates the most wages/profits. They could be rewarded with more financial support if they are successful.
Essentially, these government investments would be one-time grants.
Also, the risk is reasonably predictable. On average, 90% of startups fail. That means that returns come from the remaining 10%. If 1% finally become large, established businesses, that would be mission accomplished.
The government can even use the failed businesses as case studies, to see what the greatest cause of business failure is, and then take steps to remedy that, which would benefit all other businesses.
But what is important, is that there is a pro-indigenous business climate in the country. Right now, the government is only interested in creating such a climate for foreign investors.
What incentive whoever makes that decision has to evaluate ir properly?
They could be evaluated by an outside agency, there could be multiple and independent agencies to evaluate them.
This is not brain surgery. This is what is done all over the world.
And another thing. Just because crony politics and the like screw things up, doesn't mean that things are screwed up in the absence of crony politics as well. Accountability and transparancy are they key words for not only business, but government in general.
I think the government should make transparancy of it's finances a key policy issue. It would do an enormous amount of good for the nation, and truly improve Zambia's reputation.
In short, how is all that different from the glorious state-owned and operated companies ? And why yours would be more successful ?
Because they are not state owned or operated.
It would be a new class of company.
The biggest difference would be that where ordinary companies are legally obligated to maximize profits, these companies would be legally obligated to pay out most of their profits as salaries.
And I am not saying that all companies in the economy should operate like this, but that there should be companies in industries that are suitable, to alleviate the high levels of unemployment, and do so in a way that puts earned cash in the pockets of workers and gives them skills and experience in business.
Inflation is all about the balance between the money that is floating around the economy, versus the goods and services that are produced.??Earned money can never be inflationary.
I don't understand this... at all. Inflation is about prices.
Ok. Inflation is expressed as higher prices, it isn't the higher prices themselves.
Inflation means that there is more cash chasing the same amount of goods (trough excess printing of money or lower interest rates), or the same amount of cash chasing fewer goods (decreased production or supply of goods).
What it is, is an imbalance between goods and services, and the money that is floating around the economy.
An increased demand created by spending generates inflation (which isn't bad at all in moderate levels).
We agree on that.
What is important, is the type of spending. Is money spent on productive things, or is it just spent to cover up lack of profitability? That is they key.
Shoveling money into loss making industries by the state is inflationary. Cutting losses, and prioritizing money making ventures is not inflationary.
Putting money into potential businesses is only inflationary in the short term, and very mildly so. As soon as a number of these businesses are successful, the money is returned to the state through income tax from higher wages.
Not all investment is the same. There is also the concept of 'misinvestment'.
The relevance of "earned money" totally excapes me. Demand-shocks (which i what i think you're proposing) don't have anything to do with what's earned. The goal is to generate growth.
What I am suggesting is that as long as there is a balance between the money that is put into the economy by the state, and an increase in the produced goods and services, there is no inflation, whether that is in the short or the long run.
Look at it this way. The state took $1.1 billion out of the economy (in 2004) though taxes. If it did not borrow, and took $50 million of that and gave 100 carefully selected companies or entrepreneurs a $50,000 grant, that would not be very inflationary.
Let's say that all these businesses failed. The total inflation of the economy would be $50 million.
Compare that with a ministry like Technology and Vocational Training - which has a yearly budget of $23 million. Now what does that ministry really do, that is worth $23 million? And it spends that money every year, and probably will have budget increases as well.
There has to be a connection between the money spent, and the amount of goods and services produced.
But let's say 1 of those 100 carefully selected companies or entrepreneurs becomes the next Microsoft? Or Wal-Mart? Or a local Zesco? The amount of tax revenues that could be returned to the state could be infinite.
Add to that business incubators, mentors, and the odds get a lot better.
This kind of spending would be mildly inflationary, but it would be good inflation, related to economic growth, not government misspending or a bloated bureaucracy.
I personally think that talking about the size of the cabinet is a populist fallacy (usually followed by the size and utility of the parliament). It's for the most part fiscally irrelevant and while it often generates waste, it's in quality, not quantity.
More than just the cabinet, it is the size of government (29 or so ministries) and the way money is spent (at the ministerial level, instead of on actual services) that are extremely wasteful and lead to $386 million in personal emoluments (in the 2004 budget) with relatively little in governance to show for it.
Not if the money is properly monitored. Which can be done, by the way. Investment banks, investment funds do that all the time.
Banks, investment funds have an incentive to monitor it properly: they're trying to make money. And don't want to loose business, investment to competitors.
The government can do a lot to reduce risk in both their own lending and in investments made by the Zambian public. There should be a registry of companies, a credit registry (which I think was just created), companies themselves could be rated with regards to credit risk, return on capital, dividends paid out to shareholders, etc.
Hmmm.. I don't understand what shareholders, return to capital or financial transparency do in this sentence. Unless we're discussing a different setting, in which the Zambian government would encourage investment and not actually be the investor.
Ironically, that is very close to the business model they apply to Foreign Direct Investment. The government receives no share of the profits, they do not collect income tax, and they only depend on income from Pay As You Earn, which is the income tax payed by workers.
But I thought the idea behind "foreign direct investment" was that foreigner were directly investing ?
I mean, in such an economic setting, private investor do decide how and where to invest money and they have a simple criteria to follow: make money. Which is quite convinient when it comes to not make bad investments.
An independent state agency could make such investments.
an independent, which means non-elected and non-accountable state agency would be given tax's payers money and told to invest it in anything they see fit ?
whoa.
Bonuses, a small share of the profits (for instance, 10%), etc. There are lots of ways to create incentives for efficiency or profitability. They're not really cooperatives. The workers have no say in the management of the company. They aren't shareholders, they just receive the profits as salaries. It should be obvious from their results who generates the most wages/profits. They could be rewarded with more financial support if they are successful.
Ok, you do realize that "profits" is what one gets AFTER paying all costs, including labour ?
I mean how do you even evaluate "profits" ? Do you have like 2 payscales with a guaranteed wage and an additional part proportionnal to profits ?
And who picks managers ? Who fires them ? Do they have the right to hire and fire workers ?
Essentially, these government investments would be one-time grants. Also, the risk is reasonably predictable. On average, 90% of startups fail. That means that returns come from the remaining 10%. If 1% finally become large, established businesses, that would be mission accomplished.
Oh gosh.
99% of companies start with very little capital. And basically the ones who don't fail are the ones able to attract more capital.
The interesting thing is it's quite hard to figure out if a company is failing or not. It took amazon years before they made their first cent and Enron was considered succesfull.
Somehow I have a hard time imagining any african government technocrat being better at figuring out than the entirety of capital markets in the world.
But what is important, is that there is a pro-indigenous business climate in the country. Right now, the government is only interested in creating such a climate for foreign investors.
Of course, that's all it comes down to. And of course, businesses are either foreign or domestic and the only limit to domestic entrepreneurship is that the government gives all the breaks to foreigners. And there's no other way to encourage local businesses than heavy handed interventionism.
The idea of one-time grants is far from being bad. But what I don't get is why it should go directly to cooperative businesses.
Why not say lend funds to bank and speciliazed companies and encourage them to invest it in local business by tax breaks on the revenue yielded from those ?
At least banks have those funny people named bankers who tend to be trained to actually invest, lend, evaluate risk and all that. And they tend to do it even better when their bonus depends on that.
They could be evaluated by an outside agency, there could be multiple and independent agencies to evaluate them. This is not brain surgery. This is what is done all over the world.
Like where ?
In Korea, companies had tax breaks and low interest rate loan proportionally to their exports. (and banks did most of the investment after the government did a good job on mobilizing national savings).
In China, it's damn near FDI-only at this point (yes Chinese companies put money in but usually in partnerships in which they trust the other partner to spot opportunities)
In France, state-owned companies are on the stock market !
Accountability and transparancy are they key words for not only business, but government in general.
Here you go sounding like a Chicago economist defending the failure of a structural adjustment plan or something. "accountablity", "transparency", what's next ? Rule of law ?
Those things are a process and they're usually enforced, not "wished".
And one damn good way to enforce some financial transparency for a country is to make it play the game of FDI and non-fixed exchange rates. If they misbehave, they're punished.
The biggest difference would be that where ordinary companies are legally obligated to maximize profits, these companies would be legally obligated to pay out most of their profits as salaries. And I am not saying that all companies in the economy should operate like this, but that there should be companies in industries that are suitable, to alleviate the high levels of unemployment, and do so in a way that puts earned cash in the pockets of workers and gives them skills and experience in business.
Ok, who OWNS them ? who operates them ? Since you don't have profits, you don't have private capital and you have the state creating them in "industries that are suitable", how are they not state-owned or workers-owned ?
And I love that sentence: "there should be companies in industries that are suitable". How does one find out what's suitable ? What's suitable ? What is the goal ?
What is important, is the type of spending.
God, no.
You have Keynes, KEYNES explainning that demand-shocks and yes, inflation, will be generated no matter what the extra money is spent on, be it housing, pyramids, wars or just by putting it in your pocket and you keep arguing that somehow some spending is not inflationary ?
Even if the ministry of Technology and Vocational Training does not do much, that's $23 millions injected in the economy through salaries and other expenses.
How come that doesn't generate growth ?
There has to be a connection between the money spent, and the amount of goods and services produced.
But there is. Always.
Increase the spending and the price goes up and that production follows which raises wages which increases spending.
More than just the cabinet, it is the size of government (29 or so ministries)
Size of Cabinet = number of ministers.
Size of Government = actually size of the whole machinery.
If there's 25 ministries with 10 employees each, it's not a bigger government than if it was 5 ministries with 500 employees each.
Furthermore "actual services" are services for which generally one has to pay personnal emoluments to someone to get the job done.
Like I said, all of Africa managed to totally misunderstand what "big government" means.
(though once again, there is an argument about allocation which though fiscally irrelevant plays a big role).
Anyway, I hate going there but didn't the 20th century shows that planning (by governments, independent agencies, with incubators and mentors and transparency and good will) has limits ? I mean, you confuse facilitating the market and encouraging economic involvement with breaking the system.
Two different things.
The government can do a lot to reduce risk in both their own lending and in investments made by the Zambian public. There should be a registry of companies, a credit registry (which I think was just created), companies themselves could be rated with regards to credit risk, return on capital, dividends paid out to shareholders, etc.
Hmmm.. I don't understand what shareholders, return to capital or financial transparency do in this sentence. Unless we're discussing a different setting, in which the Zambian government would encourage investment and not actually be the investor.
Because they all reduce risk. A company that is profitable and has no debt is much less risky than a company that does. A company that needs a lot of capital to finance machinery or real estate is a lot more risky than a company with no overhead costs.
It is all about the ability to properly assess risk.
Ironically, that is very close to the business model they apply to Foreign Direct Investment. ??The government receives no share of the profits, they do not collect income tax, and they only depend on income from Pay As You Earn, which is the income tax payed by workers.
But I thought the idea behind "foreign direct investment" was that foreigner were directly investing?
I mean, in such an economic setting, private investor do decide how and where to invest money and they have a simple criteria to follow: make money. Which is quite convinient when it comes to not make bad investments.
It should be a brake on bad investments, but in reality, 90% of startups still fail.
On FDI, in reality, they are just foreign companies setting up business in Zambia. If foreign direct investment was investment of foreign money in Zambian companies, that would be a different thing. But if you look at the development agreements, if you look at how these zones operate worldwide, they are just capitulations to the interest of foreign businesses.
I would urge you to check out the documentary Life and Debt, which can be seen directly on video.google.com. It is remarkable that, like in Zambia, the very premise of these zones, that they would provide jobs, and therefore all the other sacrifices were justified, was thrown out as soon as the companies could. They started to import Chinese workers into Jamaica, instead of providing jobs for Jamaicans.
The reason is that this is all about the interest of foreign companies. And if they can get Chinese workers to do the job for virtually no wages at all, they will not hesitate a second in doing so.
An independent state agency could make such investments.
an independent, which means non-elected and non-accountable state agency would be given tax's payers money and told to invest it in anything they see fit ?
whoa.
Unappointed by the president, but not unaccountable. It could be accountable to a parliamentary committee. Appointments could be made on merit from the ranks of the civil service.
It is like when a Supreme Court Judge is appointed for life in the US. The reason that they are appointed for life, is to make them less influencable by the politicians of the day.
But at the same time, they can still be impeached - which is a kind of hearing that removes the immunity they enjoy as part of their office, and specifically for the purpose of abuse of office.
The key is oversight and transparancy. When you have those two, a lot of corruption disappears. It is the lack of transparancy and oversight that is at the root of most corruption in public office.
Bonuses, a small share of the profits (for instance, 10%), etc. There are lots of ways to create incentives for efficiency or profitability. ??They're not really cooperatives. The workers have no say in the management of the company. They aren't shareholders, they just receive the profits as salaries. ??It should be obvious from their results who generates the most wages/profits. They could be rewarded with more financial support if they are successful.?
Ok, you do realize that "profits" is what one gets AFTER paying all costs, including labour ? I mean how do you even evaluate "profits" ? Do you have like 2 payscales with a guaranteed wage and an additional part proportionnal to profits? And who picks managers ? Who fires them? Do they have the right to hire and fire workers ?
Those are details that do not really go to the principle of paying out most profits as wages.
Profits are simply all turnover minus all costs. You can have a standard hourly wage, and pay out the profits as bonuses at the end of the year, instead of paying out half of profits as dividends. I don't see the problem.
But what is important, is that there is a pro-indigenous business climate in the country. Right now, the government is only interested in creating such a climate for foreign investors.
Of course, that's all it comes down to. And of course, businesses are either foreign or domestic and the only limit to domestic entrepreneurship is that the government gives all the breaks to foreigners. And there's no other way to encourage local businesses than heavy handed interventionism.
Which is not at all the argument I am making. I have nowhere said that companies should be government run, etc. So you can't label my approach with statism and the like. I'm not going to refute statements that I haven't made.
What is clear that the current approach isn't working. It is not stimulating Zambian business to the extent that it has alleviated either poverty or unemployment to a significant degree.
If you are looking for heavy handed state intervention, you need to look no further than Japan, Korea and China.
However, I am not even gone that far. Although the idea of Zambian Keiretsu or Chaebol would be interesting, at least in certain sectors.
The idea of one-time grants is far from being bad. But what I don't get is why it should go directly to cooperative businesses.
They don't. They could go to any business. However, businesses where most of the cost are labour, or where most profits are paid out as wages, would have the biggest impact on the economy, poverty alleviation and because of labour intense production practices, on the redistribution of wealth across the entire population.
Why not say lend funds to bank and speciliazed companies and encourage them to invest it in local business by tax breaks on the revenue yielded from those ?
Because that works well for more established businesses. In fact many of the measures that are proposed by the government often have more to do with large sized businesses and corporations. Which is why there is such a gulf between the informal sector and official SMEs.
At least banks have those funny people named bankers who tend to be trained to actually invest, lend, evaluate risk and all that.
And how many of them have the actual authority to lend money? How many are specialized in funding high risk startups?
And when the money is paid out as a loan, not only does the loan have to be repaid, but but there has to be interest paid on it, and there is of course the risk premium of lending to a sector where 90% of businesses fail. Which is one of the reason many startups fail - they run out of cash before they become profitable. A system where debt repayment is not an issue would help them at such an early stage.
This is one of the reasons why so few banks are lending to small businesses in the country.
And which bank is going to do it? Stanchart? There are some banks that are getting into the micro-financing business, but they are still few and far between.
And of course, none of them are in the business of issuing grants. Plus, many people who fund startups want to have a say in how the company is run, they want to be on the board of directors, they want (in the case of angel investors) a large part of the company's shares, which the owner/manager then has to buy back at a higher price.
I say let's keep things simple and direct.
1) The agency in question makes an assessment of a company's growth potential and it's history of risk and performance.
2) They issue the grant.
3) They move on.
No government intereference, no meddling in how the business is run. No interest rates or repayments.
Banks can never be that aggressive.
More than just the cabinet, it is the size of government (29 or so ministries)
Size of Cabinet = number of ministers.
Size of Government = actually size of the whole machinery.
Actually the whole machinery would be the size of the state, not the government.
Anyway, I hate going there but didn't the 20th century shows that planning (by governments, independent agencies, with incubators and mentors and transparency and good will) has limits ?
Everything has limits. But you will not hear the Japanese or South Koreans complain about how terrible is that they live in the largest economies in the world.
I mean, you confuse facilitating the market and encouraging economic involvement with breaking the system. Two different things.
You keep making claims about what I have said, without apparently understanding what I am saying. Which could be my fault, of course, but I thought I was being pretty clear.
Where do I confuse 'facilitating the system' with 'breaking the system'?
"A cabinet is a body of high-ranking members of government, typically representing the executive branch. It can also sometimes be referred to as the Council of Ministers, an Executive Council or an Executive Committee."
"A government is "the organization, that is the governing authority of a political unit,"[1] "the ruling power in a political society,"[2] and the apparatus through which a governing body functions and exercises authority."
It's really simple. The whole meme about the size of government that you and me and everyone picked up from western politics and it does refer to what you call "the whole machinery".
Furthermore, like I said, one has to prove that reducing the number of ministries would significantly reduce the expenses.
But anyway, back to our central debate. I'll be clear and not just reply to you claims because there's an issue of intellectual jujitsu going here. Feel free to tell me if i got it wrong.
1. there's the issue of government ressource:
It seems that you're arguing that the government of Zambia can mobilize the money by getting leaner. Fine. But then you discuss agencies that would evaluate, monitor, deliver the loans etc.. The issue here is that if the goal is to make lots of investments and not just a few big ones, if you want correct evaluations, if you want to reduce the risk of corruption, if you want to double-check and monitor in a reliable ways, you would need to add a bunch of educated people to the government's payroll and pay them well (and invest in modernizing their workplace). It seems to me that it would reduce the amount of disposable money to invest. (and in banks, those people are paid by those interest rates)
2. Let's get something straight about Korea or China or Japan or Singapore. Sure the government worked closely with them, using tax breaks, credit, protecting some of their activities etc.. But those companies were and are privately owned in a system that was strongly capitalist (although not always "free market"). All those countries were far from being paradizes for organized labour. Not only they didn't pay profits as wages but they favoured capital over labour for a long period. Strikes and unions were repressed, sometimes violently, wages went up gradually, working conditions were and in the case of China still are horrible. Surely the living standards of their workers eventually improved but it was through market interactions, by improving the human capital (through education) and via the establishment of a social safety net.
What I don't get is your insistence on doing many different things at the same time. I doubt you'd find a set of policy, particularly a set of policies related to firms' core structure that would at the same time maximize growth and equality. In short, as concern I am about redistribution, I'm sort of doubtful of the idea that equally sharing the cake will make the cake get bigger.
Sharing the cake is really the job of social policies, the provision of social goods and all that.
To take an example, I think one thing that bankrupted state-owned companies, the public service in Zambia but in many other African countries was the idea that their main task was to distribute wealth (by paying wages as high high as possible, by providing as much revenue as possible to the state) and not to generate wealth (or quality of services). Putting that money delivering education, infrastructure and other public goods would have been a better idea.
(or just think about the fact that conditions in mines in China aren't great either but chinese people are quite happy about their cheap energy, their growing companies etc..)
3. I'm not defending the status-quo. I know banking is not as efficient as it could be, I agree that clarity and predictability would improve a lot of things. I even agree that creating a favorable investment structure for foreign companies only is stupid. After all, nothing says that zambian businesses don't generate growth either. So if reforms there are, they must be over the board and comprehensive, which DAs aren't, at all.
But what I don't get is how a criticism of an unefficient system that has a bunch of bottleneck doesn't lead to just removing those bottlenecks. Want more zambian investment ? Well why not working on figuring out why zambian banks and investors aren't more active ? After all, it's what they do for a living, surely they wouldn't mind more business. And why not working on how to inegrate the informal economy in the formal one ?
What also don't get is the refusal of discussing incentives. Yeah when one takes a loan he repays it and interest rates. But on one hand, it is the prospect of making money from the interest rate that encourages the bank to loan it in the first place (and it encourages the lenders to loan it to the bank). On the other hand, when people know they have to repay a loan plus interest, they sort have a motivation to actually make money out of that money.
4. The labour intensive/micro credit thing is overblown. I mean why would one favour say rail or road transport. They have high capital costs, you have to mantain and reinvest the equipment etc.. With foot transport, it's all labour ! You just have to pay a 100 guy who would carry stuff on their back !
But you wouldn't. It would be costly. and unefficient. There would be less long distance transport and the guys would end up worse off than if one or two of them were train machinists (because the other guys would find jobs in the series of businesses created by the ease of transportation).
The same logic applies to agriculture. Heavily mechanized commercial farms would make raw food stuff cheaper (economies of scale), creating a transformation industry, opening other industry by reducing the food share of zambian households' budget... etc..
Plus picking fruit or carrying stuff on one's back is even less plesant than mining.
The problem with microcredit is that it sorts of works on a small is beautiful, let's all be entrepreneurs logic that in the world has never boosted an economy. After all, did Korea use microcredit ? Did Japan ? Did they think "oh let's concentrate on the most labour intensive activities we can find" ?
What we need is more manufacturing, more heavy idnsutry, more mining (yes), more commercial agriculture and all of that has a cost: capital.
So tell me if this is an invalid critique.
(Also, no i won't watch "life and debt" even if it has been recommended to me a million times. I sort of think that wondering why Costa Rica took off is more interesting than questions about why Jamaica or Haiti didn't. Especially when the answers used to explain the failure (IMF, gringos, free trade, capitalism, unequal land distribution, United Fruit) are all elements present in Costa Rica.)
4. The labour intensive/micro credit thing is overblown. I mean why would one favour say rail or road transport. They have high capital costs, you have to mantain and reinvest the equipment etc.. With foot transport, it's all labour ! You just have to pay a 100 guy who would carry stuff on their back !
But you wouldn't. It would be costly. and unefficient.
That is because you are talking about making something artificially labour intensive.
I am talking about products where there is no alternative to manual labour.
Plus picking fruit or carrying stuff on one's back is even less plesant than mining.
I doubt that. And there are plenty of people doing unpleasant jobs.
What you're really talking about here is prestige. I'm talking about cash.
The problem with microcredit is that it sorts of works on a small is beautiful, let's all be entrepreneurs logic that in the world has never boosted an economy. After all, did Korea use microcredit ? Did Japan ? Did they think "oh let's concentrate on the most labour intensive activities we can find" ?
What we need is more manufacturing, more heavy idnsutry, more mining (yes), more commercial agriculture and all of that has a cost: capital.
Onwards and upwards, comrades. :) Now who sounds old time socialist?
Let me put it like this. The average developed economy has one SME for every 20 inhabitants.
That means around half a million SMEs even in every smaller EU country. Those are single proprietors like doctors and dentists, shops in malls and high streets, tiny services companies, lawyers, accountants, computer repair shops, etc.
Zambia has a massive informal sector of literally millions of marketeers and subsistence farmers - and yet, they are the ones who too would be employing most of the population.
So the question is getting from A to B.
I would suggest massively helping these entrepreneurs to step up their operations if they want to, to create a better educated workforce, make financing available to them, and provide them with the infrastructure they need to do business.
(Also, no i won't watch "life and debt" even if it has been recommended to me a million times. I sort of think that wondering why Costa Rica took off is more interesting than questions about why Jamaica or Haiti didn't.
Well you should have the courage of your convictions and know both. At least you get a good view of what can go wrong with these free trade zones, which are the subject of this thread to begin with. Otherwise, economic theories have a tendency to become religions instead. I find that confronting uncomfortable information is the only way to stay intellectually flexible.
I am talking about products where there is no alternative to manual labour.
I asked you what you had in mind before but I'll ask again: like what ?
I doubt that. And there are plenty of people doing unpleasant jobs.
What you're really talking about here is prestige. I'm talking about cash.
No i'm talking about work conditions, personnal satisfaction etc.. Yet if you're talking about cash, why don't we discuss wages of miners vs most unskilled workers in the rest of the economy ?
Onwards and upwards, comrades. :) Now who sounds old time socialist? Let me put it like this. The average developed economy has one SME for every 20 inhabitants. That means around half a million SMEs even in every smaller EU country. Those are single proprietors like doctors and dentists, shops in malls and high streets, tiny services companies, lawyers, accountants, computer repair shops, etc.
Well Old Time Socialists made and still make a lot more sense than those neo-luddites green alter-globalists. :-)
But anyway. Who said SME are single proprietors ? And most importantly, do you realize that the M part of SME includes by most standards companies with up to 249 employees ?
The most interesting part however is how they work and what they do. Dentists, small shops, lawyers etc.. are service companies and I have a hard time seeing them as causes of growth rather than the result. In short, they're not different from the various service businesses that exist in mining towns.
The other way to look at it is to think of manufacturing SME which tend to be on the biggest side of the category. In Japan, Korea, Catalunia, Germany those represent a considerable part of the manufacturing sector and the most dynamic one. However, they still fit in a division of labour and flexibility narative and at least in the case of Japan, it may even be a smart way for bigger companies who do have social obligations (lifetime employement, pensions etc..) to bypass those.
So like.. How do SME matter ?
I would suggest massively helping these entrepreneurs to step up their operations if they want to, to create a better educated workforce, make financing available to them, and provide them with the infrastructure they need to do business.
Well, my point was that to get to point B, you may have to industrialize, mechanize, integrate, formalize and all that. I don't disagree with investing in infrastructure and education or even with making financial products more readily available but the trick is to not delay the unevitable and in my opinion disappearance of subsistence farming and other unefficient activities . The goal is to create new sectors, new activities, new companies, new jobs. And when I say new, i mean things that people didn't do before.
Well you should have the courage of your convictions and know both. At least you get a good view of what can go wrong with these free trade zones, which are the subject of this thread to begin with. Otherwise, economic theories have a tendency to become religions instead. I find that confronting uncomfortable information is the only way to stay intellectually flexible.
No you don't get what I said. I know what can go wrong with thse free trade zones and I know what can go right. The problem for me is to figure out why and how they go wrong or right and I believe that can only be done by lookig at both successes and failures at the same time. Sadly, that never happens, instead one gets a shooting match between those who say "IT'S GOOD" and those who scream "IT'S BAD !".
Furthermore, my understanding of "Life and Debt" is that it discusses structural adjustments and things like that. That's an even more boring topic on which both sides are wrong. The anti-IMFers never explain why those places needed IMF loans to start with (obviously something was wrong) and pro-IMFers never really explain why there is only one structural adjustment package. So yeah, blah.
And confronting uncomfortable information ? When is the last time you directly confronted "neo-liberal" arguments ?
I am talking about products where there is no alternative to manual labour.
I asked you what you had in mind before but I'll ask again: like what?
Labour intensive would be:
Faceting of gemstones and diamonds:
http://www.faceters.com/
Zambia exports a lot of gemstones and precious metals. While exporting raw materials, it is also exporting jobs. There are a lot of individuals in for instance Antwerp, which is the diamond cutting center, who could be mentoring artisans in Zambia and have a skill transfer, without handing over the entire gemstone industry to foreign companies.
Vanilla pods
http://www.vanilla.com/html/facts-beans.html
http://www.ehow.com/how_2034723_grow-vanilla.html?ref=fuel
These are used for flavouring in a wide range of products (creating a huge and diversified market) and are extremely labour intensive, because all pollination has to be done by hand.
Tropical hardwoods - growing and manufacturing
http://tropicaltreefarms.com/
Asia uses a lot of hardwoods in their home construction. A teak tree takes about 15-20 years to mature, but when they do, they are easily worth $20,000 at today's prices. So their value grows about $1,000 per year, per tree. Growing trees for 2 decades is also environmentally friendly (with an eye on grants). Not exactly labour intensive, but something villages or chiefs can use to put their land to use and reap the rewards in 20 years time. A plantation of 1000 trees will be worth $20,000,000 in 20 years time (plus inflation).
I have another industry in mind, but I'm working on that right now. :)
Tree farms are capital intensive and not necessarily environementally friendly. And the oddest thing is that the less capital intensive of them (cheapest seed, faster growth, lower maintenance) species tend to be the most environementally devastating: eucalyptus.
Valinna pods, gemstones have their own issues. I mean yes they are labour intensive but the picture is complicated. I mean, with existing artificial alternatives, they're lucky they didn't end up in the way the rubber industry did.
Part of the why it didnt happen is that they kept the labour part of their cost relatively low and/or concentrated on higher value operations. So there is alternative to manual labour, it's just not a cheaper alternative.
What that means is that one has to be very careful in evaluating the potential for job creation and for wage growth in those sectors.
Between the fact that Antwerp's (and Israel) quality standards are the result of hundreds of years of specialization or the fact that India has hundreds of years of specialization AND low wages (but less mechanization), it's tough to fit in that equilibrium.
In short, one has to remember who they're competing with.
I may be wrong but I think you'll say that in the case of gemstones and diamonds, the local production could be captured simply by legislating.
Well, the Economist (though not my favorite magazine) has an interesting article on the uphill battle Botswana (and neighbourgs) face.
http://www.economist.com/business/displaystory.cfm?story_id=10881673&fsrc=RSS
Notice that the Botswana approach differs from the South African one in the sense that they're encouraging local cutting but not necessarily of local stones and they're doing so by, well encouraging productivity (that's where De Beers's capital and "savoir-faire" matters).
The risk with mandating local cutting is that it could if cutting is unprofitable, badly affect the upstream mining industry.
So yeah, I'm still unconvinced.
(and a bit worried by Cho's silence. Are our semi-uninformed debates too boring for you, zambian economist ? ;-) )
Random,
"(and a bit worried by Cho's silence. Are our semi-uninformed debates too boring for you, zambian economist ? ;-) )"
Far from it!
Very fascinating exchanges indeed!
I thought I lost my opportunity to weigh in the discussion a while back as your exchanges have vacillated from one contentious point to the next. But thanks for letting me back in! You make some interesting points:
” 1. There’s the issue of government resource:
It seems that you're arguing that the government of Zambia can mobilize the money by getting leaner. Fine. But then you discuss agencies that would evaluate, monitor, deliver the loans etc.. The issue here is that if the goal is to make lots of investments and not just a few big ones, if you want correct evaluations, if you want to reduce the risk of corruption, if you want to double-check and monitor in a reliable ways, you would need to add a bunch of educated people to the government's payroll and pay them well (and invest in modernizing their workplace).” ?
I agree that there’s a real tension between small government and effective government. The challenge for any government is to find the optimal size of government that rightly balances the need to cut waste but ensure that it can do its job. The push for efficiency is not easy, but this is why political competition is important to ensure that different political parties push for reform that moves us closer to the optimal point. In general I do think that what we should be calling for is “institutional reform” of which government size, service delivery and other aspects are part of the debate.
”2. Let's get something straight about Korea or China or Japan or Singapore. Sure the government worked closely with them, using tax breaks, credit, protecting some of their activities etc.. But those companies were and are privately owned in a system that was strongly capitalist (although not always "free market"). All those countries were far from being paradizes for organized labour. Not only they didn't pay profits as wages but they favoured capital over labour for a long period. Strikes and unions were repressed, sometimes violently, wages went up gradually, working conditions were and in the case of China still are horrible. Surely the living standards of their workers eventually improved but it was through market interactions, by improving the human capital (through education) and via the establishment of a social safety net.”
Agreed.
” I'm sort of doubtful of the idea that equally sharing the cake will make the cake get bigger”
Presumably the point being that you don’t believe any form of redistribution can enhance growth? You are from the Kuznets school!
I must say that there are instances where redistribution enhances financial deepening and other areas which ultimately contribute to growth (e.g. land redistribution ). The impact of redistribution on creating open institutions also should not be ignored (the Engerman / Sokoloff angle).
”Sharing the cake is really the job of social policies, the provision of social goods and all that. “
Can you expand further on this?
”To take an example, I think one thing that bankrupted state-owned companies, the public service in Zambia but in many other African countries was the idea that their main task was to distribute wealth (by paying wages as high high as possible, by providing as much revenue as possible to the state) and not to generate wealth (or quality of services). Putting that money delivering education, infrastructure and other public goods would have been a better idea.”
I agree that was the failure. But I think it was failure in understanding that wealth creation and social goals can go together. See my latest blog Valuable lessons for aspiring 'foreign investors'. The same lessons can be applied to governments. There’s no reason why Governments cannot run a purely profit based model and partner that with a more private social entrepreneur (Thanks for prompting this thought by the way!)
And the teak farm idea is not part of my labour intensive indrustry examples. However, it has a huge potential for wealth accumulation in rural areas.
Tree farms are capital intensive and not necessarily environementally friendly.
Not at all. This file puts the total 15 year cost at $10,000 per hectare for a small teak plantation in Nigeria. This includes 1600 saplings per hectare. (See Table 1.)
http://woek.boku.ac.at/sht/download/Valuation%20Olasina.pdf
Especially if you already own the land (like for instance Chiefs do), costs would be low. Land would be the biggest overhead cost, because it would be out of alternative uses for 20 years. A small nursery could supply most of the new trees. They need some labour in planting and thinning, but other than that, they just stand there and grow. Fertilizer can be home made, not that they need much.
The only requirement is that the general climate is wet enough for the types of trees that are grown, and with enough land, even water can be provided for through rainwater storage.
Interesting article from The Economist (and the Economist Intelligence Unit isn't my favorite either):
Cutting adds about 40% to the value of rough stones.
And that is just diamonds, which are themselves more valuable than gemstones, for which that percentage would be even higher.
Bad Samaritans - The Myth of Free Trade and the Secret History of Capitalism
http://www.youtube.com/watch?v=T5-ojv5-b3U
A lecture by Cambridge economics professor Han-Joon Chang, against neoliberalism, free trade and globalisation.
Thanks for this link.
I've embedded the link into a new post.
Sorry guys, my wife made me stay away from this post all weekend. :-)
Cho,
I must say that there are instances where redistribution enhances financial deepening and other areas which ultimately contribute to growth (e.g. land redistribution ). The impact of redistribution on creating open institutions also should not be ignored (the Engerman / Sokoloff angle).
Agreed. But those are indirect, long-term benefits, aren't they ? Could constant land redistributions generate growth ?
”Sharing the cake is really the job of social policies, the provision of social goods and all that. “ Can you expand further on this?
I guess what i'm saying is that redistribution is better handled through taxation, provision of public services and social policy in general.
In short, people often worry about economic policy generating growth but not social benefits/equality/helping the poor etc.. Well, may be the two things should separated. The economic policy should generate growth (make the pie grow) and then through taxation and public services the social policy should redistribute.
I think the example of the mismanagement of state-owned companies explains it. Mines benefit the country more when they make more money and generate more taxes which can be used to invest in education, health services and other goodies.
Trying to make them do both at the same time, backfires.
There’s no reason why Governments cannot run a purely profit based model and partner that with a more private social entrepreneur (Thanks for prompting this thought by the way!)
They don't even have to have a private social entrepreneur !
Think about the telecoms for instance. Companies like France Telecom were run like for-profit companies with a few public service goals. Mainly it was the obligation to deliver services on most or all of the territory at equal prices. That meant higher average prices for everyone but also meant that the company had to be even more tighly managed to keep prices somewhat low. On the other hand, Sotelco (the congolese telecom company, tell me if zamtel was different) was used to hire people, partly to reward political allies but mostly to create jobs. As a result, it was a fiscal catastrophe and the service was lackluster.
It is a corny thing to think about, really. And it's obviously stupid of the governments but that problem of bizarre prioritazation was (is ?) quite common.
Mr K,
$10,000 for an hectare is a HUGE investment ! Especially with a 40,000 Nairas benefit after 15 years !
And remember tha you have to think in terms of opportunity costs. Even if you own the land, using it for a Teak farm prevents you from using it for say growing maize or building houses or renting it to a factory. And after 15 years, you may have lost a lot of potential revenue.
Also you can't use an estimate and then wishfully decide you can reduce the costs with things like "a small nursery could supply" or "need some labour". Mantaining the tree farm was 1/3 of the costs in the estimate ! And for the nursery, well it still has to get seeds from somewhere, it has to devellop them, it has to devellop enough to supply seeds for hectares of trees, all that has a cost and it can end up being more expensive tha buying some seed from Indonesia and planting it right away.
Cutting adds about 40% to the value of rough stones. And that is just diamonds, which are themselves more valuable than gemstones, for which that percentage would be even higher.
COST COST COST COST COST !
Getting stones out of the earth adds value to them, separating it from dirt/rocks adds value to them, cutting them too, putting them on rings or industrial equipment adds even more.
The issue is how much does it cost to do each thing. And how much would it cost to do it elsewhere.
Random African,
Also you can't use an estimate and then wishfully decide you can reduce the costs with things like "a small nursery could supply" or "need some labour". Mantaining the tree farm was 1/3 of the costs in the estimate !
I am saying that this is where you get creative. For instance, labour could be solved by giving income tax reductions to people who put in 1 day's work a week for the local chief. Or use the National Service. I'm sure they could even get a grant for planting trees.
And, land cost could be taken out of the equation, by making a deal with the local chief - for instance, 2 hectares for 10% of the fully matured teak trees.
The problem with looking at business from a rigid 'there must be a profit now' because that is the way things ought to be done, you are placing artificial limitations on your business model. There are a lot of ways to kick the overhead into the future, when the business model is pretty straightforward.
Also, $10,000 over 15 years, is $667,- per hectare, per year. That is not a huge financial cost. We're not talking about huge number of hectares. If one mature tree takes up 10 square meters, there would be 100 trees per hectare.
And remember tha you have to think in terms of opportunity costs. Even if you own the land, using it for a Teak farm prevents you from using it for say growing maize or building houses or renting it to a factory. And after 15 years, you may have lost a lot of potential revenue.
At $20,000 for a mature tree, that is a yield of 2,000,000 per hectare in 20 years. That is an average yield of $100,000 per hectare, per year.
That blows out of the water any maize that is grown ($400,- per hectare per harvest/year).
The income from 1 hectare of maize that yields 2 tonnes of maize, with a per tonne price of $200,-, would be $400,- per harvest.
Remember that trees planted for timber are planted close together, to prevent branching and keep all the growth in the trunk and the canopy. (I walked around in a forest like that once - very eery. Very little life on the ground floor, because very little light protrudes through the canopy.)
COST COST COST COST COST ! Getting stones out of the earth adds value to them, separating it from dirt/rocks adds value to them, cutting them too, putting them on rings or industrial equipment adds even more. The issue is how much does it cost to do each thing. And how much would it cost to do it elsewhere.
So you're saying that no one is making a profit in the jewelry industry.
Do you have any proof that none of this can be done profitably in Zambia? I'm looking forward to seeing that.
I am saying that this is where you get creative.
Sure, one can try. But you also have to be realistic. Look at the Business Plan made by the guy in Nigeria. Look at what costs can be reduce, be it by being creative or just because Nigeria is not Zambia, look at which costs will be bigger because, well, Zambia is not Nigeria. And then think about your cost reductions and how they would affect your product and potentially your revenue.
For instance, the correct answer for the land cost issue is not "making a deal with the local chief" because well, that delays the cost and does not take it out of the equation. However you could have said: well in Zambia, contrary to Nigeria, there is a lot of unused land that would potentially stay unused in the next 20 years, so not only that makes land cheaper in general but you can actually establish a new agricultural activity that wouldn't disturb the others.
At $20,000 for a mature tree, that is a yield of 2,000,000 per hectare in 20 years. That is an average yield of $100,000 per hectare, per year.
Ok that's exactly what I mean by wishful thinking. First of all, I don't see $20,000 for a mature tree in that projection. I see $6,902 for 25 years in table 1 and $5,616 for 20 years in table 2.
But then, you cannot look for the lowest cost estimate and compare it with a high proceed estimate from a different source. That is dangerously naive.
Beyond that, the Costa Rican estimate bases its cost on a quite high volume (more than a million cube feet), its forest itself is 1% of the territory of Costa Rica, the economies of scale they are able to manage don't compute with "We're not talking about huge number of hectares". Not to mention the fact they use cloning and a bunch of other costly technologies.
The Nigerian estimate on the other hand had a 30% yield, which is not bad, but there are saving accounts that make more. And that's the issue you don't see. The problem is not wanting "profits, now", it's finding the activities that would generate the most money. An investment that doesn't generate returns for 15 years is a bit more risky than one that gets you paid every year sometimes twice a year.
So you're saying that no one is making a profit in the jewelry industry. Do you have any proof that none of this can be done profitably in Zambia?
I'm not saying that no one is making a profit, i'm not even saying that it cannot be profitable in Zambia, I'm saying that you have to look at how it could be profitable in Zambia rather than arguing that it would.
You will have to sell your cut stones and other people are selling them too. If you sell equivalent quality ones at a higher price, no one will buy them. If you buy them at an unprofitable price from mining company, they won't sell them.
So yeah, with Antwerp, with Isreal, with India, with now Botswana and South Africa, with China all having their labour cost / quality and quantity of output ratios as competition, tell what would make Zambia fit in ?
It's certainly not raising labour costs or not rewarding capital investment.
Couple of interesting articles on MFEZ's:
http://www.saidzambia.gov.zm/index.php?option=com_content&task=view&id=63&Itemid=79
http://www.grips.ac.jp/forum-e/DCDA/Chapter08.pdf
Note that tax breaks are only for 5 to 10 years and not forever, so it may well be worth for the government to build the infrastructure for MFEZ's.
Note in second article:
"Lessons for Africa based on Malaysia’s experiences It is a common view of policy-makers in Africa and advisers from donors thatcomparative advantage is an important and essential factor for a country’s eco-nomic development. However, comparative advantage is not the key. It is com-petitive advantage that is the most essential element for development. In simple terms, comparative advantage depends on factors like a country’s naturalresources and location, so the country has no choice in the matter, while com-petitive advantage must be fostered by man to make full use of comparativeadvantage. For competitive advantage to develop, there is a need for maximum coopera-tion, efficiency and incorruptibility among the forces that initially make up aTOH."(triangle of hope)
For TRUE figures.Don't mine the fence undermining investment to comeupon no communities they belong to.Zambians are complaing for windfall tax in the mines, then how do they bear their hands off this news.
So far neither the coffee planations nor the safari companies have managed to provide an alternative to copper and cobalt so Shenbishi is a desperate attempt to create wealth in a poverty stricken country that has tried everything else. Zambia does not have the kind of labour that the Asian assembly lines employ and the future for small African countries is bleak unless they take economic integration seriously and stop looking to the outside world for salvation.
According to this article, Egyptian special economic zomes have 10% corporate income tax rate with no sunset clause, no value added tax and maximum 5% import tariff, no "forced" partnerships with local firms and no restrictions on funds transfers and profit repatriations:
http://allafrica.com/stories/200907170130.html
Kafue,
Very generous terms, but may be Egypt is investing heavily on technological tranfers or it is not making the infrastructure available.
Different nations have different MFEZ models, without cleat evidence on what "works" and doesn't.
More info on the Egyptian Special Economic Zones, utilities are available and 51 companies have already started operations:
http://www.ecoim.ca/english/en2-3.php
http://www.mfa.gov.eg/NR/rdonlyres/4FB82601-7EE4-4FE0-ACE6-4E5B2FA67A3D/2204/13content123124.pdf
Note the corporate tax comparison table for special economic zones, Egypt (10% tax rate) beats even Singapore (26% tax rate).
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