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Tuesday, 7 October 2008

The ever growing economic zone....

The 'Zambian Shenzhen' is growing and so are the tax breaks. Reuters report that the latest deals include tax waivers to U.S firms seeking to invest within the economic zone, and; South African property firm HBW Developers who plan to construct a shopping mall and offices opposite the Chambishi multifacility economic zone at a cost of $160 million. In the word of Mutati, tax incentives would apply to "any other foreign companies regardless of where they are coming from."

20 comments:

  1. Good, the more investment the better. There are huge amounts of investment that could come in if there are attractive conditions for it, and thereby creating many jobs.

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  2. Neoliberalism is dead. The more people know the details, the more impossible it becomes to maintain as a position.

    There is no evidence that these economic zones have any appreciable effect on the local economies. They are certainly not the best use of resources.

    Note that nowhere in the article is it mentioned who actually owns the companies, or even the zone itself. Nowhere is it mentioned what the quality of these jobs is going to be, or how much people are going to be paid.

    "The Chinese have been courting major U.S. firms operating in China to come and invest here and we will offer them tax incentives as well," he said. "This will also apply to any other foreign companies regardless of where they are coming from."

    What are the tax incentives given to ZAMBIAN firms in these zones. Are they even allowed to set up shop in them?

    "We expect that the opening up of the zone to other global players will attract more investments and create more jobs," he added.

    And export more profits.

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  3. Mr K,
    "There is no evidence that these economic zones have any appreciable effect on the local economies. They are certainly not the best use of resources. "

    Could be true, I see the main benefit as bringing jobs to a country with high unemployment. In the absence of competitive advantage, they are the best use of resources.

    Mr K,
    "Note that nowhere in the article is it mentioned who actually owns the companies, or even the zone itself."

    Who cares? As long as they bring jobs it does not matter. Chinese proverb "It does not matter what color the cat is as long as it catches mice." Many countries are going all out to attract investment, so I find your statement to be surprising.

    Mr K,
    "And export more profits"

    And attract more capital.

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  4. MrK is correct, the jury is still out.

    I have said before, someone needs to sit down and do a cost benefit analysis. We lose X amount of tax in the absense of the policy, assuming we still get Z taxable investment. In addition as the 'Zambian Shenzhen' looks, government also pays for the roads and all else, as well as moving people off land. All that should be costed as Y. We gain M jobs, but NO technological spillovers or direct transfer of skills, since there's no strategy in place to do that, in any case empirical evidence suggests that DOMESTIC FIRMS have to have some level of know how to benefit. So what do we have in the end?

    This is the thought process, I expect our government to show...give us the analysis....

    It might be that this thing really does work.

    But it strikes me we need to know if these companies don't pay tax..don't build infrastructure....what are we getting in return?

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  5. The tax exemption is for a limited number of years, they will pay tax after the tax holiday expires. The premise for the investment is that getting some jobs (and income) is better than having no jobs, and eventually the government will be receiving income tax revenue after the tax holidays expire. Especially in countries with high unemployment and low tax revenues.

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  6. Interesting article, this time about a Zambian investment firm:

    http://www.daily-mail.co.zm/media/news/viewnews.cgi?category=15&id=1223455758

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  7. This comment has been removed by the author.

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  8. Kafue001,

    "There is no evidence that these economic zones have any appreciable effect on the local economies. They are certainly not the best use of resources. "

    Could be true, I see the main benefit as bringing jobs to a country with high unemployment. In the absence of competitive advantage, they are the best use of resources.

    I'm not even getting into the competitive advantage of a country which exports (at least at one time) 25% of the world's copper and even more of the world's cobalt, only has 3% of arable land under permanent irrigation and only cultivates 20% of arable land.

    That is what we should be focusing on, not attracting foreing businesses.

    One day at the library, a book beckoned from the shelves. One Thousand Ways To Make $1000 it was called. This book explained the concept of compound interest. Warren started thinking: If he made $1000, as the book said, and it grew at a yearly rate of 10% interest, in 5 years, $1000 would become more than $1600; in 10 years, it would become almost $2600; and in 25 years, it would become more than $10,800. He could picture the numbers compounding as vividly as the way a snowball grew when he rolled it across the lawn.

    http://www.parade.com/hot-topics/0809/how-warren-buffett-made-his-first-dime

    Economies grow the same way - through re-investment of profits instead of compounding interest.

    And that is why the expatriation of profits has not reduced poverty or created more jobs. In fact, neocolonialism itself depends on the exportation of raw materials - and to add insult to injury, we aren't even allowed to tax those properly.

    That is exploitation, and that is why Zambia remains poor when it should be one of the richest countries in the world.

    Mr K,
    "Note that nowhere in the article is it mentioned who actually owns the companies, or even the zone itself."


    Who cares? As long as they bring jobs it does not matter. Chinese proverb "It does not matter what color the cat is as long as it catches mice." Many countries are going all out to attract investment, so I find your statement to be surprising.

    Here is why it is important. Whoever owns the companies receives the profits from that company.

    You cannot live in an economy with jobs only. At some point, you actually have to own something. Because jobs come and go. At some point you become too old to work, and you can't turn over that cost on the family. There have to be pension funds, or you have to own shares in your own company or you will die poor, no matter hwo hard you have worked in your life.

    This is incredible to me. It goes against everything that is known about successful economies.

    The tax exemption is for a limited number of years, they will pay tax after the tax holiday expires.

    Or change their name, or pick up and set up in another country. Once they have been shown a way to not pay taxes, they can even adjust their business model to that fact. And they still get to keep everything they make and pay their employees dirt.

    Mr K,
    "And export more profits"


    And attract more capital.

    For what purpose? More foreign corporations owning the Zambian economy and not reinvesting or even paying taxes?

    Why do you think that with record copper prices, the Zambian state's coffers are not piling over with US dollars, like the Saudi coffers are?

    Because they actually get paid for exporting oil. They would NEVER export oil for the sake of exporting oil or 'because it brings jobs'.

    Most jobs in Saudi Arabia are done by migrants now. That's the difference.


    Cho,

    But it strikes me we need to know if these companies don't pay tax..don't build infrastructure....what are we getting in return?

    50 cent per hour jobs, if we're lucky.

    Which of course is only a fraction of the actual value of what is being exported.

    Neoliberalism is a corporate ideology, created by elitists (like Ayn Rand who hated ordinary people after the Bolsheviks confiscated her daddy's store), for the benefit of corporations and the economic elite who own them.

    Benito Mussolini said it best: when the state takes over the corporations, you have communism; when the corporations take over the state, you have fascism.

    When it boils down to it, neoliberalism, with it's privatised state functions, it's privatized armies of mercenaries, with services available only to those who can pay for them personally, is an ideology by the rich, for the rich. And the majority of the people of Zambia are poor and will not benefit from it at all. No matter how many economic zones they build instead of developing the national economy.

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  9. The news article appears to have moved, here is the investment firm website:

    http://zinitz.com/default.aspx

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  10. Mr K,

    Your theories I think could work if there is competitive advantage in the country (plenty of capital, good infrastructure, good management, good government, less bureaucracy and red tape, skilled workforce, low input costs, etc).
    While Zambia may have some of the above, business will thrive where most of the factors are present. And meanwhile as Zambia develops its competitive advantage, the question is what to do about the high rate of unemployment. To help bring it down I suggest attracting foreign investment. There are huge amounts of capital available overseas which can create many jobs in Zambia if they are given the right incentives to invest there.

    And don't be fixated by the low wage level. Low wages rarely last. As the economy develops and workforce becomes more skilled and educated, the demand will increase for labor and drive up their wages. Just look at China and Mauritius. People also move on to better jobs during their working life.

    http://www.nytimes.com/2006/04/03/business/03labor.html?pagewanted=1&_r=1&8bl

    And don't be fixated by where profits are going. In a global economy profits go everywhere, what is more important in the short term is where jobs are created. In the long term as the economy develops, companies which have good reason to base their operations in Zambia (possibly for logistical reasons (Zambia's central location) will keep their profits there).

    I don't see why your growth strategies and mine need to be mutually exclusive, both can operate simultaneously (although I think mine will be easier to implement because the private sector will be doing most of the work).

    Mr K,
    "You cannot live in an economy with jobs only. At some point, you actually have to own something."

    It is called savings, that is what people do either voluntarily or involuntarily (social security or national provident fund deduction from wages). That is how people own somethng, they save from their wages and use it to invest or buy something. Done over time it accumulates to a sizeable amount. Also some companies give stock options to their employees, and that could be a possible road to wealth.

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  11. Chinese savings rate is 50%:

    http://www.theatlantic.com/doc/200801/fallows-chinese-dollars/2

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  12. Cho,

    In addition as the 'Zambian Shenzhen' looks, government also pays for the roads and all else,

    Neoliberal theory is very sketchy on who would pay for all the services companies actually use. Especially in the absence of the state receiving taxes from them.

    In fact, as the tax burden has shifted from corporate taxes to workers income tax (PAYE), it are the workers who pay for the services corporations enjoy, like road maintenance.

    I call that exploitation.

    as well as moving people off land.

    Which is a disgrace.

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  13. I would suggest the U.S. model of using fuel taxes for road maintenance instead of general revenue:

    http://en.wikipedia.org/wiki/Gas_tax

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  14. In the word of Mutati, tax incentives would apply to "any other foreign companies regardless of where they are coming from."

    My question would be: do they apply to Zambian companies and if not, why not?

    And if not, the MMD is continuing a colonial era discrimination between indigenous companies and farmers, and foreign companies and farmers.

    Kafue001,

    Mr K,
    "You cannot live in an economy with jobs only. At some point, you actually have to own something."


    It is called savings, that is what people do either voluntarily or involuntarily (social security or national provident fund deduction from wages).

    In a country where 70% of the people live on less than $1 per day, and spend all or most of that for food and energy, there are no savings. If there were, they would be using them right now.

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  15. Mr K,
    "In a country where 70% of the people live on less than $1 per day, and spend all or most of that for food and energy, there are no savings. If there were, they would be using them right now."

    I was referring to people employed in the economic zones who have better ability to save.

    http://www.spiegel.de/international/spiegel/0,1518,412237,00.html

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  16. Mr K,
    "My question would be: do they apply to Zambian companies and if not, why not?
    And if not, the MMD is continuing a colonial era discrimination between indigenous companies and farmers, and foreign companies and farmers."

    It is a trade off. Weighing the amount of capital that can be attracted from overseas and number of jobs that can be created as a result and comparing it against the number of jobs that can be created locally if incentives were given to local investors (who by the way have less access to capital locally). The powers that be did a calculation and also looked at other countries experiences and decided that this was the way to proceed. The foreign investors are also required to invest a minimum amount and subject to work permit regulations for the investor, something that is not required of local investors. And the tax incentives are for a limited period, not forever.

    http://www.saidzambia.gov.zm/index.php?option=com_content&task=view&id=63&Itemid=79

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  17. Kafue001,

    " The powers that be did a calculation and also looked at other countries experiences and decided that this was the way to proceed. "

    No they didn't. This is standard, conveyor belt IMF policy.

    They give exactly the same prescription to Russia, Indonesia, Argentia, El Salvador, etc., all completely different economies.

    And that is the problem. Not only have they never developed a single country, but their prescriptions are dogmatic and ideological. They are looking to create a global free trade zone where there is no government interference and capital can be allocated anywhere in the world by western corporations. A world run by corportations, for corporations.

    These prescriptions are not unique to Zambia, and have not been created for Zambia's specific requirements.

    From the website:

    Among the incentives provided include a zero per cent tax rate on dividends for a period of five years from the year of first declaration of dividends,

    What if they don't declare dividends? Remember that Microsoft did not pay out dividends for most of it's existence.

    zero percent tax rate on profits for the first five years for years six to eight, only 50 per cent of the profits will be taxed and for years nine to ten, only 75 per cent of the profits will be taxed

    What is my incentive to declare any profits at all? Can I simply defer profits into next year's capital expenditures, like the mining companies did?

    No taxes for 5 years is a long time, only half my profits are taxed for the next three years, and and two years after that only 75% of profits are taxed. So on average for the next decade, I would pay taxes over 30% of profits. How does this not give a huge advantage over foreign businesses, as opposed to Zambian ones?

    It is important to remember that this is not the actual tax rate, only the percentage of profits that are elligible for taxation. And a decade is a long time for any business.

    and zero per cent import duty rate on raw materials, capital goods, machinery including trucks and specialized motor vehicles for five years for enterprises operating in the MFEZ.

    Why only for foreign businesses? There are far more Zambian businesses, so why not apply those tax exemptions to them as well?

    If this is such a good idea, why limit it to the MFEZs?

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  18. Mr K,
    "No they didn't. This is standard, conveyor belt IMF policy."

    Really? Show me the policy which states that.

    Mr K,
    "They are looking to create a global free trade zone where there is no government interference and capital can be allocated anywhere in the world by western corporations. A world run by corportations, for corporations."

    Corporations should definitely be free to allocate capital anywhere they wish. This is how efficiency and competitiveness is created. Without those two features, economies would eventually crumble.

    Mr K,
    "So on average for the next decade, I would pay taxes over 30% of profits. How does this not give a huge advantage over foreign businesses, as opposed to Zambian ones? "

    That is the price to be paid for bringing in capital, expertise and creating jobs. Also keep in mind, when a foreign investor makes an investment, he always is under the risk that his investment may be nationalized if the political climate in the country changes, so he needs to be given incentives to come in. Besides huge amounts of capital that can be accessed from overseas, expertise can also be brought in. For example, a locomotive manufacturer may decide that due to Zambia's central location and upcoming steel plant, it makes sense to manufacture locomotive parts in Zambia. The expertise to manufacture those parts will be brought in by the manufacturer and taught to Zambians.

    Mr K,
    "Why only for foreign businesses? There are far more Zambian businesses, so why not apply those tax exemptions to them as well?
    If this is such a good idea, why limit it to the MFEZs?"

    As stated above, to attract foreign investors to Zambia with limited duration tax incentives with the potential to create more jobs than Zambian businesses can, because of foreign investors access to more capital and their expertise in other areas. If tax incentives were given to everybody, there would be too much of a drop in tax revenue.

    So for example, $1 billion of any investment creates 10,000 jobs. Zambian businesses can access $2 billion of capital to create 20,000 jobs. However foreign investors can access $6 billion of capital from worldwide to create 60,000 jobs locally. So Zambia ends up with 40,000 jobs more because of incentives given to foreign investors. In other words, foreign investors have more leverage to create more jobs.

    Theoretically, your proposal to give tax incentives locally could work, but it would take probably many decades to create the same number of jobs, due to less ability locally to access capital and provide expertise.

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  19. Interesting article:

    http://www.economist.com/displaystory.cfm?story_id=12376610

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  20. Another country with special economic zone:

    http://www.economist.com/world/mideast-africa/displaystory.cfm?story_id=12436181

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