Two separate IRIN reports highlight how the worsening economic situation in Zimbabwe is fuelling sex trade. Women with families are now being forced by the economic conditions to literally sell sex for soap. Many wives are now coerced by their husbands to seduce other men for food. I can only imagine that in Zimbabwe's many villages, early marriages have reached record proportions, as families try to cope with the economic mess. This is the side of Zimbabwe that Mugabe denies exist.
Thursday, 31 July 2008
Government appears to be pressing ahead with recent threats to blacklist newly-recruited teachers who refuse to take up rural appointments. IPS reports the Ministry of Education is working on making the Teacher Service Form a legally-binding document, to give government more leverage in sending graduating teachers to the small districts and rural schools where they are so badly needed. A previous blog highlighted the folly of such an approach.
Wednesday, 30 July 2008
Mozambique was forced by the World Bank and IMF to liberalise its cashew industry in the 1990s. A policy which provided little benefit for poor cashew farmers and led to the bankruptcy of factories in most cities. You can read more here.
Just in case you have been wondering what has happened to the Draft Land Policy , which we have discussed many times on this blog (e.g. here). Apparently, its not dead, or rather the need for it has not died. According the Lands Minister, Bradford Machila, the Cabinet will only approve the draft national land policy after the ongoing National Constitution Conference (NCC) discusses land issues in Zambia.
Not surprising, with rising food prices, Zambian farmers in Eastern province are now resorting to smuggling maize into Malawi. With the current export restriction on Maize, farmers on Zambia's borders are doing all they can to squeeze that extra cash. These sorts of activities simply underline the limitations of relying on export restrictions as a long term strategy of maintaining food security, especially for a nation with porous borders. A previous blog hinted on the same.
Zimbabwe will slash 10 zeros from its currency from Aug. 1, in bid to bring hyperinflation under control. Atleast that is the official line. Of course, redenomination can also be used as a method of confiscation. The Zimbabwean government may demand that such an exchange takes place within a short period of time, hoping that not all Zimbabweans will exchange the available cash. The old currency that won't be exchanged is essentially revenue - indirect seignorage - for the government.
Tuesday, 29 July 2008
The Mozambican government is apparently considering proposals for legislation that would make access to food a basic right. The legislation would defend "the right of every person to have physical and economic access to food at all times, in sufficient quantity and quality".
At this stage, you might be wondering where you have heard that before. Yes, it is our very own Mung'omba Draft Constitution Article 70, part (1) : Every person has the right to be free from hunger and to have to have access to food in quantities and of adequate quality and cultural acceptability. Article 63 provides the carefully worded supporting text - Parliament shall enact which provides measures which are reasonable in order to achieve the progressive realisation of the economic, social and cultural rights referred to in Articles 65 - 71.
I can't wait for the NCC to debate this one!
The definition of "reasonable" will most certainly spark some discussion.
Monday, 28 July 2008
Yet another example of how poor funding undermines institutional reform. The fight against corruption is supposed to be spearheaded by the Anti-Corruption Commission (ACC). Data and information collection is critical to enable timely and focused corruption interventions. That needs money, and money is what they don't have - so until that arrives, one can only hope for the "good will" of Zambians to take the stance on corruption. In the words of Acting Director General, Rosewine Wandi :
"ACC faces several challenges such as lack of adequate funding from the Government to enable us execute our operations effectively. My appeal is for all Zambians to take a personal stance against the scourge and partner with us because this fight concerns everyone..”
Saturday, 26 July 2008
Wise words from outgoing US Ambassador Carmen Martinez on the current political uncertainty over the President's health that has gripped the nation :
"I know many of you here feel that you are in a very difficult and perhaps a crisis period, but I don't think people should look at it as a crisis. I think you should look at it with pride and confidence that your nation that came from colonialism has moved into independence, multi-party democracy and you conducted four elections peacefully. You have a peaceful and stable country and I just hope that the Zambian people will be more confident of their own ability to weather any crisis that may come along..."As I noted here, there's no doubt that ordinary Zambians' trust in government has been shaken due to the poor nature of the updates and general lack of transparency. However, it is also equally true to that the President's illness presents a remarkable opportunity for Zambia to further renewal itself and continue to send strong message to the outside world and investors at large. A stable and calm handling of the situation, as has been so far, continues to send a strong message to the outside world that our political and economic institutions are stable and resilient. The ability to handle shocks to the system always sends that strong message to investors, that all is well. In the words of Murray Sanderson "...economic development depends on much more than natural resources, money and technical skills. Far more important are certain intangible factors, such as trust, the rule of law, respect for property rights, and a reputation for dependability". If Zambia can continue to demonstrate these things over this uncertain period, we stand well for the future.
Reuters report that the ever expanding Celtel has even bigger plans for domination:
"Customer numbers exceeded 2.3 million in June (from) 1.6 million in June 2007(and) 1.9 million in December 2007. We are optimistic we will reach our target of 2.7 million in December," Venn said
Celtel is also in talks with the government on its plans to launch 3G (third generation network) which will allow it to provide high-speed data communication services, including mobile internet services, Venn said.
"Our efforts to cut the cost of telecommunications are strained by high taxes. About 50 percent of the cost of communications goes to government taxes," he said.
Venn said Celtel was still negotiating for its own international gateway licence with the Communications Authority in a bid to improve international calls, currently routed through the state Zamtel telecoms company.
Friday, 25 July 2008
Source : Living Conditions Monitoring Survey Report 2006 (CSO Draft)
An interesting chart from an elusive report. I managed to find this chart, as it is relevant to the discussion we had here, but bizarrely not the report itself (the CSO have stopped responding to my emails!). Its obvious that much of the internal migration is within urban and rural areas. Perhaps the rural-urban drift isn't as pronounced as we thought ? Could the poor conditions in urban areas and already high urbanisation (35%) have brought about a natural equilibrium?
Incidentally after reviewing that discussion , it was interesting see how the discussion conflated two separate but closely related issues. The first is whether the rural-urban drift is good or bad. The second issue relates to uneven development - and whether that is good or bad. Much of the discussion from contributors seemed to automatically assume that because "rural urban drift" leads to "uneven development" it is bad! A wrong conclusion!
Rural urban drift by itself is neither good or bad. In fact, I would go as far as to agree with most urban economists that urbanization and economic development are intimately related, and the concentration of resources – labor and capital – in our cities is a part of this process. To the extent that people move from rural areas to urban areas in response to market signals, there is no reason for us to worry about the rural urban drift. However, the problem might be with respect to unpriced externalities e.g. pollution, road congestion and epidemics. The right policy response is therefore to price these things (through an appropriate urban tax), and allow the rural urban drift to flourish. The problem of course is how to set such a tax properly.
The issue of uneven development is really about "spatial inequality". The question is whether, having priced in urban externalities, should we still be worried about uneven development around the country? Presumably yes, for reasons the same reasons we care about income inequality in general. Or is there something special about "spatial inequality"? I do accept that theoretically income inequality can increase without changes in urban-rural inequality. My question is whether spatial inequality is special.
Would be interested to hear what the contributors from the first rural-urban drift post think.
The National Constitution Conference (NCC) has proposed that a new body should be established to register and supervise political parties. Clause 112 (e ) of the Mung'omba Draft Constitution requires the Electoral Commission of Zambia to ensure "the registration and supervision of political parties, including the promotion of operational harmony between and among political parties". If the NCC proposal is accepted, then essentially the ECZ would retain the "registration" aspect, but political supervision would fall to a new body, whose shape and functions is currently undefined. The ECZ suffers from funding, and therefore more responsibility for them is just a bad idea. But where is the money for this new body going to come from? And more importantly, how crucial is this new body? Do we really new a body just to get political parties to talk to each other? Perhaps this could be done through the National Assessmbly to cut costs ?
Undeterred by the rising jet fuel prices, Zambezi Airlines announced this week that it is acquiring a Boeing 737-300 aircraft, in what it hopes to be a serious attempt to establish itself as a "regional player". Not sure adding one aircraft would do the job, but acquiring the 737-300 gives it some bragging rights, for now, because Zambian Airways fleet has 737-200s.
Thursday, 24 July 2008
Another example of how poor funding undermines institutional reform. Zambia is supposed to have continuous voter registration, the reason we don't have such a system apparently is because the Electoral Commission of Zambia (ECZ) has no money:
Justice Mambilima also said that the ECZ was not able to implement the continuous voter registration exercise owing to inadequate funding. “In 2007, the ECZ was given K300 million for the exercise while this year only K17 million was allocated from a budget of K119 billion,” Justice Mambilima said. Parliament passed the law for the continuous voter registration in 2001 but the process has still not started because of inadequate funding.To rectify the problem, the ECZ is pushing the NCC to include a clause in the new constitution that would compel the government to fund the institution without hesitation. Which raises the question of whether that should be applied to the myriad of other commissions which may created.
Yet another example, why Lilian Kapulu's recent threats to blacklist newly-recruited teachers who refuse to take up rural appointments are hollow. Its quite obvious from Nkombo Kachemba's report that one of the key constraints for rural education is lack of decent accommodation. Addressing that constraint should be at the forefront of addressing rural teacher shortage. Excerpt :
Teachers deployed in rural areas usually abandon their postings due to lack of accommodation. This as a result frustrates Government’s efforts in providing good quality education to school going children in rural areas. Most teachers argue that in rural areas, houses are few forcing some of them to be sharing accommodation. Others contend that most houses are dilapidated and do not have essential facilities like water and sanitation.
Despite calls by Government to have all teachers report to their respective schools, the number of teachers shunning rural schools has increased.
A recent visit to Kalala Upper Basic School in Chibombo district revealed some of the hardships that teachers in rural areas go through. The school has 16 teachers against four staff houses which are supposed to carter for all of them. Most teachers share accommodation and others have to travel five kilometres to were their houses are, a situation which has raised concern among school authorities.
Others live in what they call ‘quarters’, these are small rooms with no proper sanitation and accommodate two or three teachers. The houses have no ventilation, the walls have cracks and the ceiling usually leaks during the rainy seasons.
Wednesday, 23 July 2008
A new paper finds no evidence between corruption and investment in Sub-Saharan Africa. The authors clearly appear shocked by the finding, and try hard to put some political spin on it. Excerpt:
Although a number of studies have examined the impact of corruption on aggregate investments, very few have analyzed the effect of corruption on firm-level investments. This paper analyzes the impact of corruption on firm-level investment growth. We find that the effect of corruption varies significantly across regions: corruption has an adverse effect on investment growth for Transition countries, but has no significant effect for Latin America and the Caribbean and Sub-Saharan Africa. Furthermore, among the variables included in the regressions (firm size, firm ownership, trade orientation, industry, GDP growth, inflation and openness to trade) corruption is the most important determinant of investment growth for Transition countries.
Our finding that corruption has no significant effect on investment in Latin America and Sub Saharan Africa does not imply that corruption is less of a concern in these two regions. A plausible explanation is that corruption provides private rents to some firms. However, these private gains to some firms, do not necessarily translate into social gains. In fact, a number of country-level studies have demonstrated that corruption impedes investments and economic growth (e.g., Mauro, 1995; Pellagrini and Gerlach, 2004), reduces public investments in healthcare, education, and infrastructure (e.g., Tanzi and Davoodi, 1997; Mauro, 1998), and results in large social welfare losses (Bose, 2004; Guriev, 2004). Another important point is that our analysis pertains only to firms that are already operating within the country. It is likely that large levels of corruption may prevent many firms from operating in these regions in the first place. However, this loss of potential investments resulting from corruption is not captured by our model. Thus, although corruption does not have a significant effect on investment growth, it is possible, and indeed likely that it might deter the entry of firms. As a consequence, the overall effect of corruption on investment (which includes the loss of potential investments) may be negative.
A new electronic magazine called Executive Issues is being lauched. Its unclear whether a website exists for the magazine. The aspirations appear similar to the African Executive, but unlike its name sake, the first issue appears more reporting than analysis.
We are already familiar with the politics of poverty (here, here and here), but veteran politician and Anti- Corruption Commissioner Akashambatwa Mbikusita introduce us to another feature of Zambian politics :
Except of course, this is not really new. Aka undoubtedly has high profile cases in mind, but in truth at the local level, political parties always engage in buying local leadership. Zambia's grass root democracy has actually been dependent on such vote buying since independence. Its difficult to imagine local people becoming engaged in the political process without some form of immediate return e.g. a good bottle of Kachasu or Chibuku. I suspect without such inducements on voting day, in many of our villages no one would bother to vote because the return from voting is minimal.
“....Some people who are aspiring for high political positions now look at the size of their pockets...People now think leadership is purchasable therefore, they can use their falsely acquired wealth to buy votes....This issue of buying leadership is confusing because people now think all it takes to lead Zambia is to buy votes. This is a great insult one can have against citizens who sacrificed a lot for Zambia’s independence,”.
Tuesday, 22 July 2008
Zambia’s oldest political party, United National Independence Party (UNIP), is apparently on the verge of collapse. The party that dominated the country’s political landscape now has only one parliamentary seat in the 150-seat National Assembly. The party’s continued fall from grace has triggered intra-party wrangles that further threaten the continued existence of the party. Felix Nkinke reflects on UNIP's woes.
Monday, 21 July 2008
The National Constitution Conference (NCC) has rejected the proposal to allow Zambians abroad to vote. Clause 109 (g ) of the Mung'omba Draft Constitution requires the Electoral Commission of Zambia to ensure that "facilities are available for citizens living abroad to vote". Sensibly the Electoral Commission of Zambia and other participants agreed that this was a costly exercise.
A while back there was a petition doing arounds at various Zambian websites to allow Zambians abroad to vote. I always thought the idea was crazy. The ECZ has barely enough money, let alone the personnel to enforce its existing obligations, how Mung'omba and Co expected them to put facilities in place for Zambians abroad to vote is beyond me. What is unfortunate is that many Zambians abroad even jumped on this idea and started doing petitions. Many arguing that voting is right - at any financial price?
Sunday, 20 July 2008
I am confident that this proposal, allegedly attributed to Magande by the Sunday Mail , was simply a joke lost in translation :
Mr Magande said Government did not know who was importing vehicles into Zambia. He said that Government might be compelled to restrict the number of vehicles being imported as a stop-gap measure to maintain fuel stocks.
Various constitution clauses are now being adopted by the NCC on various matters. Hope to track the updates through this NCC Discussion Updates thread. Last week, the NCC endorsed the 50% + 1 proposal to "enhance legitimacy, curb regionalism and integrate Zambians through a popularly elected leader". Many people who raise objection to this clause, worry that it could be costly. But in the words of Andrew Sakala democracy is not a cheap exercise. Not cheap, but hopefully still value for money.
By the way, isn't it odd that people always raise "the next best alternative spend" argument, when they don't like something? Health Deputy Minister Lwipa Puma is allegedly to have opposed the 50% + 1 because "the money to be spent on the exercise [in the event of re-run] could instead be channeled to other needy areas such as education and health sectors." The money can always be spent on other things. Mr Puma's wages can be spent on other things. We can close down some of our pointless embassies and spend money on other things. The question is whether that best alternative yields better long term benefits than the proposal under consideration. I am in no position to judge whether spending money on an election re-run following the 50% + 1 clause, is more beneficial than 10 new schools, but I do know that its up to society to judge these things, not Mr Puma.
A new MSU paper examines role of input subsidies in stimulating growth and addressing food security and poverty alleviation objectives. The paper examines empirical studies from Malawi, Zambia, and Kenya.
Saturday, 19 July 2008
A new study by the HSRC Press, entitled 'Resource Intensity, Knowledge and Development: Insights from Africa and South America' takes a fresh look at resource-strong economies. Focusing on the technological trajectories of firms and research teams in resource-intensive sectors in Brazil, Costa Rica, Peru and South Africa, the study argues that what ultimately contributes to growth is not an abundance (or lack) of natural resources, but what one does with it.
The work was commissioned by the South African Department of Science and Technology (DST) with the aim of contributing to principles that would guide public policy in promoting resource-based technology clusters, and to explore the concept of lateral migration. It forms a part of the DST’s national research and development strategy to leverage know-how in resource-based industries to create new knowledge-based industries.
"People are not opposed to the increase of tariffs but the question everyone is asking is... 'Is Zesco going to be more efficient if the tariffs are raised? The answer is 'no'. Right now Zesco is not an efficient company in that in most of the power that it generates, very little reaches the final consumers, the end users....There is need to dismember Zesco. You want invite private sectors like Lunsemfwa and other private individuals to come in the market yet you want Zesco to monopolise the power distribution facility. How is that possible......There is need to have an independent carrier in place to specifically handle transmission. Let Zesco do their core business which is generation."
Bob Sichinga (The Post)
Friday, 18 July 2008
Searchers are Zambians who are making a difference on the ground, and are not waiting for the Government to act. By this definition farmer the mothers of Matero, must count as our latest searchers. This small group of Zambian grandmothers have embarked on a mission to help the Matero community in the fight against Aids and poverty. In what is Zambia's largest and oldest compound, the 19 women volunteers who make up Kwasha Mukwenu work tirelessly feeding families and educating orphaned children.
The Commonwealth Parliamentary Association (CPA) delegation earlier this week called for a new law that would allow traditional rulers to take part in administering mine licences to mining companies.
The fundamental problem is one illustrated by Chief Chisunka three weeks ago, where people are exploring minerals in areas without full knowledge of local chiefs, and in some cases appear to own "mining rights" for entire provinces! Of course for chiefs this is simply an issue of power struggle, something we will examine in a number of blog specials on traditional leadership.
It's instructive to compare the Zambia situation with the approach being taken by the Mozambican government. Mozambique has decided to put the map of all mining licences in the provinces where there is substantial mining activity on-line, so that it can be consulted by anyone with internet connection. Such a move does not remove the power struggles, but it certainly helps know who is doing what. Incidentally, the problem of land squabbles among chiefs can also be resolved by publishing the 1958 maps online.
African Eagle Resources Plc and CGA Mining Ltd plan to invest an initial $60.93 million to produce about 59,000 tonnes of copper concentrate at the Mkushi copper project. A feasibility study would be concluded this year and construction of a concentrator and mine development will start in 2009.
The first "video quotable" of the weekly quotable series, comes from Ms Masebo on her threat to de-register the two chiefs at logger heads with each other.
This is the second time Ms Masebo has issued such a threat. Under the Chiefs Act (1965) -found under the Laws of Zambia, Volume 16 - the President does indeed possess the power to withdraw the recognition of a chief, senior chief (etc). But as Ms Masebo noted in 2005 Daily Parlimantary Debate on Southern Province Chiefs, the President cannot stop people from recognising someone as a chief or stop someone being a chief. Interesting to note that in the same session, she also cautioned against playing politics with chiefs and promised us a new draft chiefs policy. The former seems to have overtaken her, and the latter remains undelivered:
Now, I know that a number of hon. Members like to play politics with the issues of chiefs. We advise that politicians should not get involved in these traditional issues because, at the end of the day, we will just create more problems than solutions.
Mr Speaker, it is in this House where one hon. Member brought a question on why a chief was not given the status of paramount chief. I gave the same answer then, but it is as if it is I, Masebo, who does not want this particular chief to be made into a paramount chief, and yet it is the policy of this Government and not just this Government, but that of the preceding Governments as well. However, this does not stop anybody or any traditional grouping from calling a particular person whom they think is a born and established chief. However, from the Government’s point of view, we have decided, for now, to maintain the status quo.
Obviously, the Government is looking into all these issues, taking into account the various queries that have come in. We have developed a draft policy for chiefs. The policy will take into account all the issues of upgrading or recognising chiefs, chiefdom boundaries, issues of palaces and the general welfare of chiefs. It is in this policy that we hope that some of these issues will be addressed. I would like the hon. Members to assist us by waiting until the policy is endorsed. In the meantime, it would be appreciated if they could understand what the current policy is and explain it to their royal highnesses. The policy of the Government is not to bring up issues just to create confusion and problems.
Thursday, 17 July 2008
This story over the weekend certainly brought some form of relief. The state of our hospitality industry is truly shambolic. Its not that Zambia has no motels / hotels, on the contrary, we have so many that the authorities find it difficult to enforce standards. The number of hotels have outstripped government's ability to check their operations. This is a problem because hospitality is an experience good, or is it a "credence good"? The other point is that a good hospitality industry is crucial for tourism and the associated evenue it brings into government coffers. The rationale for government intervention, in form of standard setting there appears solid.
One possible policy intervention worth seriously considering is to make it mandatory that motels/hotels that use "electricity" also have generators or some other emergency power. It is seems like common sense that someone who runs an hotel would have a generator. Unfortunately, very few Zambian motels / hotels seem to have generators, as my wife and I found out in January when we moved from place to place in Ndola in search of power. For many of our motels when the power goes out, everything goes out, including appropriate standards of cleanliness.
Wednesday, 16 July 2008
During the third quarter of 2008, inflationary pressures may arise from the following factors:
- Increasing crude oil prices on the world market, which has resulted in an increase on domestic petroleum prices despite the reduction in tax;
- The removal of the Government subsidy on domestic fuel prices, which has resulted in higher prices. This will in turn translate into higher commodity prices due to increased transportation and production costs;
- The rise in water and sewerage rates effected in June 2008 which may have a negative impact on production costs; and
- The increase in Government expenditure arising from the 15% wage increase for civil servants back-dated to January 2008, which may increase liquidity if not managed effectively.
However, these pressures may be mitigated by pass-through effects of the appreciation in the exchange rate of the Kwacha against major foreign currencies on account of strong external sector performance. In addition, food inflation may ease as the crop marketing season activities increase.
The Leader of the Opposition, Michael Sata has made a very sensible suggestion on how to handle the current uncertainty surrounding the President:
"...You know the speculations which are coming were presented by two senior government leaders, the Vice-President and defence minister George Mpombo when they had prayers at the Cathedral of the Holy Cross, when the Vice-President who is supposed to show leadership and the minister who is also supposed to show leadership started sobbing, weeping in public. What do you expect us who are very remote and don't know what is going on to think?....I think this Cabinet should show leadership by revoking a constitutional requirement and when they revoke a constitutional requirement, they should sit as Cabinet and request the Chief Justice to constitute a medical board. And that medical board should go to Paris and give us an independent situation as it is happening..."The government appears to have lost significant credibility in the eyes of many Zambians by the poor updates that they have been giving, which in some respect simply insults the intelligence of many observers. Daily messages that repeats the "stability" clause are not helpful. As many have noted, there are many simple facts the government can present without intruding on "privacy". Simple questions should be asked and addressed. For example, is the President in a coma? What are the chances of survival? Basic questions that any person asks on the bed side. I have found the whole situation quite ironic. The President has been a champion of transparency (atleast relative to previous leaders), now the people around him appear to conceal information in the name of protecting his privacy. It would be most unfortunate if this is the abiding memory of the Mwanawasa administration that becomes engraved on the minds of ordinary Zambians. A group of ministers, who having been left without a leader, seemed to abandon moral restraint. At the very time when the nation demanded honesty and transparency, they hid the truth, and put their personal agendas ahead of protecting the integrity of the sitting President and the rule of law, in the process losing their long grip on power.
Interesting but cryptic comments from Deputy Mines Minister Maxwell Mwale. Apparently government will soon establish trust funds that will make mining companies contribute funds towards the sustainability of local communities. These trust funds would be controlled and managed by the communities themselves (presumably with significant control mechanisms?).
Nkana Member of Parliament Mwenya Musenge recently called for similar fund and we discussed that proposal under sharing the proceeds of mining. This is not the first government has come up with these ideas. A while back the idea of Local Development Fund modelled on the Environmental Protection Fund was suggested (whatever happended to the EPF by the way?). Whatever model is ultimately used, I am pretty sure this is more about shariing the existing cake, rather than generating new resources for communities outside the tax system. Would be interested to hear from others on how this has been done for other countries.
Tuesday, 15 July 2008
A new paper debunks claims made in several academic papers, that having large resource endowments (e.g. copper or oil) can negatively impact long-term economic growth of countries. It appears previous results have been down to misinterpretation of available data. Excerpt:
Contrary to the claims of the literature on the curse of natural resources, we believe there is little or no evidence that the large endowments of oil or minerals slow down long term economic growth. In fact, the data available so far suggest that natural resources enhance long term growth. We have demonstrated this result by focusing on the levels of per capita GDP rather than on the rates of growth over any given period of time. Our reasoning is simple. If Country A has a higher per capita GDP than Country B, Country A must have experienced faster growth over the long term than Country B.
In addition, we have shown that the negative effect of large endowments of “point-source” resources on institutions claimed in the literature is mostly due to the use of initial GDP values as control variables. Large natural resource endowments appear to increase per capita GDP without a simultaneous mprovement of the country’s institutions. Because of this and because institutions in countries with few natural resources are positively correlated with GDP, the use of GDP as a control in a regression of the quality of institutions on oil or mineral wealth biases the results towards a negative effect of natural resources on institutions. According to their GDP, natural resource rich countries should have good institutions. Because their institutions are poor relative to industrialized countries with similar GDP levels (i.e., they are at the level where they would have been if the country had no oil) the regression assigns a negative coefficient to the measure of oil wealth. In this situation, however, it is wrong to say that oil wealth has caused a deterioration of institutions. It simply has not improved them.
The fact that growth based on oil wealth does not improve institutions may and probably should be viewed as a drawback of resource-based growth. In this sense one may perhaps speak of the curse of natural resources. In an indirect way, however, this result supports the view that the main causality goes from institutions to growth rather than the other way around (see Acemoglu et al., 2001, and Rodrik et al., 2004).
Monday, 14 July 2008
Neo Simutanyi asks some very important questions on LPM's illness and Zambia's current power vacuum. It is good to read a Zambian analyst who is not afraid to ask the painful questions that ordinary citizens are asking, but which politicians will always be afraid to ask because the political costs are high:
This is a great article, but I think it would have been even greater if Neo had acknowledged that they simply won't do so. As I argued in a previous blog, the incentives for the Cabinet to act are weak. We know that the Cabinet has the power to determine whether the President is incapacitated or not. The point is that they have no strong incentives for doing so. Unless the MMD ruptures from within, Zambia may remain in this limbo for a while.
Levy's illness and question of transition, Neo Simutanyi , The Post, Commentary :
On Thursday July 3, 2008 the country woke up to a rumour that President Levy Mwanawasa had died. When international news channels confirmed the rumour around mid-morning, the country was plunged in political and economic turmoil.
However, the swift denial of the story by the government authorities has not helped remove the uncertainty which has visited our country since then. Indeed, there is uncertainty as to whether the government reports on the condition of President Mwanawasa are credible; there is uncertainty as to what happens if he will not be able to return to his duties and there is uncertainty regarding transition arrangements.
The whole nation is aware that President Mwanawasa suffered a stroke at the African Union (AU) Summit in Sharm-el-Sheik, Egypt on Sunday June 29, 2008. He was admitted to Sharm-el-Sheik International Hospital and underwent a surgical operation. On July 2, 2008 he was flown to Paris for specialist treatment.
The government has not explained in what condition he was, when he was airlifted to Paris, whether he was very serious, critical or in a coma. Regular updates on the President’s condition have been carefully worded to read “he is making steady, but slow progress and is in stable condition.” It is difficult to understand what is meant by ‘stable’ condition in an Intensive Care Unit of Percy Military Hospital. It is difficult to imagine that our President is still receiving treatment for high blood pressure.
Last week, the nation was informed the President underwent a successful minor operation to improve his breathing. But at no time were we informed that President Mwanawasa was experiencing breathing difficulties or was on a life-support machine. When some prominent Zambians requested to go and visit President Mwanawasa in hospital, they were told not to do so.
Is there something the government is hiding about the condition of our President? As far as I know, no journalist has been allowed to visit President Mwanawasa since he was hospitalised in Paris. Somehow, many Zambians now doubt the credibility of the official updates on the President’s condition posted on the State House website and search for alternative sources of information. They have every right to know the health and condition of their President.
The health and condition of President Mwanawasa is a matter of national importance. The President is a national institution and in our political set-up is a key driver of change. Little gets done without the President’s involvement. I join the rest of the country in praying for and wishing our President a speedy recovery.
The outpouring of sympathy to the first lady Maureen Mwanawasa and national prayers for President Mwanawasa’s recovery demonstrate the nation’s acknowledgement of Mwanawasa’s leadership. However, while we wish the President a speedy recovery we should prepare ourselves for the worst. What happens, if President Mwanawasa will be unable to return to his duties? There is no need for the leadership to shirk the issue and hope that it will sort itself in the near future.
Since I returned from Zimbabwe recently, I have been persistently asked the question: “what happens if the President is unable to return to his duties?” Others have even asked me, “what does the constitution say about transition arrangements?” These questions signify anxiety and uncertainty about the future.
To be sure, Zambia is a constitutional democracy and elaborate procedures are provided in article 36 and 38 of the Constitution, regarding what happens if the President is unable to discharge the functions of his office due to incapacity or for reasons of death. Barring the worst from happening, the country needs effective leadership at the top. In my view, the Vice-President and his colleagues in Cabinet should provide leadership by invoking provisions of article 36 of the Constitution, which is to establish whether or not President Mwanawasa is in a position to continue to discharge the function of his office.
Others may find this to be uncharitable or even taboo. How on earth should people talk of removing President Mwanawasa from his position when he is critically ill? This is not about Levy Mwanawasa but the office of President of the Republic of Zambia.
People should not personalise the position. It is a constitutional office and we the citizens have a right to comment on what should happen, should the incumbent be incapacitated due to ill-health. We cannot allow speculation and rumour to continue playing havoc on the national psyche and financial markets. Neither is it right to let misinformation fuel political in-fighting within the ruling circles as a consequence of the continued illness of President Mwanawasa.
Transitional arrangements as to what happens should Mwanawasa not be able to continue with his duties appear to be highly contested. There are those who do not even want the transition to be discussed just now. How do you prepare the nation for change of leadership other than to discuss it?
While we all would want Mwanawasa to get well and complete his term of office, he is only mortal and that expectation may not be realised. Others may have wanted him to be around to anoint a successor so that the question of who succeeds him in 2011 is decided once and for all. What happens if he will not be able to do so?
For the first time in our history, as a country, we are confronted with the dilemma of presidential succession, where the incumbent may be unable to continue due to incapacity. It is important to approach this issue with utmost sensitivity and seriousness. Those who may have banked their political ambitions to ascend to the presidency by simply being anointed by Levy should realise that the nation will need to move on. It is neither preposterous nor taboo to begin to talk about transition arrangements right now.
The nation needs to know that the Constitution is unambiguous on the fact that the Vice-President shall act as President in an event of a vacancy in the office of President for a period of three months, followed by an election. There should be no talk of Vice-President Rupiah Banda being disqualified for this or other reason to assume that role, should it come to that.
In the last week, there has also been in-fighting within the ruling MMD due to a suggestion by party spokesperson Benny Tetamashimba that the question of a successor should be discussed when President Mwanawasa returns back home. Many of his party colleagues found his sentiments inappropriate and ill-timed given the fact that Mwanawasa still lies in a critical but ‘stable’ condition at a Paris hospital. But that is not to say that he was off the mark. The point is the MMD has no succession plan and the unexpected illness of President Mwanawasa has left the party without a leader and a possible presidential candidate should there be need to hold presidential elections. I know for sure that there are not less than 24 aspiring MMD presidential aspirants whose aspirations will be thrown into disarray should Mwanawasa not return to his position and should there be early elections.
The nation looks to the current leadership to assure them that they will be able to manage the transition. The people need assurance that there will be political and economic stability during the transition, should it come to that. There is need to know that policies that are in place will not undergo fundamental change.
But that may not be sufficient to calm the markets. There is still a lingering uncertainty as to whether, should there be a presidential election the MMD will be able to win it. My advice to those in the MMD who are demonising Tetamashimba is this: put your house in order and think of the big picture.
MMD’s hold on power may soon come under threat and it is important that the MMD leadership address themselves to this important challenge than dwell on trivialities. But while we all hope it will not come to that, there is need to expect the worst. email@example.com
The CSO June Edition can be found here. Inflations continues its upward movement. Inflation was recorded at 12.1 percent in June. This rate is 1.2 of a percentage point higher than the May rate of 10.9 percent. Compared with the same period last year, the annual rate of inflation declined by 1.0 percentage points, from 11.1 percent in June 2007 to 12.1 percent in June 2008.
The increase of 1.2 of a percentage points in the annual inflation rate is attributed to the increase in the cost of food, with sugar prices accounting for 1.0 percentage points out of the total increase of 1.2 percentage points. Annual food inflation rate was recorded at 15.6 percent in June 2008, compared to 11.7 percent in May 2008. The annual non-food inflation rate was recorded at 8.8 percent in June 2008, compared to 10.1 percent in May 2008.
Saturday, 12 July 2008
The Panel on Zed on the possibility of an incapacitated Levy remaining in charge. Could Levy's treatment of Ben Kapita be a foreshadow of things to come? As I said in the previous blog, the incentives for waiting, and hence the Ben Kapita specter, appears sufficiently strong within the Cabinet. The only pressure for change may come from within MMD where a rift appears to be emerging between "insiders" and "outsiders".
“.....I would rather go to prison on behalf of the people of Zambia than keep quiet on knowing how much commissioners at NCC are getting....We know from Parliament that NCC was allocated K400 billion.We want to know how it’s being disbursed...when they are spending taxpayers’ money, the taxpayer who can’t afford a bag of mealie meal is entitled to know how they are spending money at NCC. The people of Zambia are paying more for food, fuel and bus fares just to feed the NCC, how can we stop talking?......Mwangala Zaloumis [NCC spokesperson] is very free to seek legal protection. She can’t intimidate me, the colonial government failed to intimidate me......the NCC is a public institution and if it is a public institution, the public has a constitutional right to seek clarification and query some of the things in which, in the public’s opinion are not right. We query government institutions and the presidency, which is the highest office in the land. On what does she want to seek legal protection? The people of Zambia knew how much the Chona commissioners were getting, people knew how much the Mvunga commissioners were getting, people knew how much the Mwanakatwe commissioners were getting and recently the Mung’omba commissioners. So what is the offence for us to know how much commissioners on NCC are getting?...”
Friday, 11 July 2008
The Angolan government is pushing for large agro-industrial companies (modelled on Brazil) to ensure the sustainability of food stocks. Back in 2006, the state owned Pungo Andongo farm came into being, spanning 36,000 hectares. Now with rising food prices the government is seeking to expand more on this. In securing our food , I argue that Zambia should explore the potential benefits of more mechanised farming given to expand food production, perhaps through a combination of fiscal incentives for would be mechanised farmers, and greater investment in appropriate infrastructure.
Is it possible that Zambia can take advantage of the current global food price rise and use it to reduce poverty and accelerate national development?
Should Zambia, like many other countries, respond to this challenge with self interest by limiting or totally banning exports of foodstuffs that are essential to our population?
Will that sustain food security in Zambia? Is such a move economically and ethically justified? How can a country which has just begun to enjoy robust economic growth above five per cent like Zambia position itself to be a beneficiary rather than a victim of such changing tides and swings of the global economic and development pendulum?
When you think of these questions, you realise that the odds and stakes are high; the political choices are equally delicate and serious, while the economic and human development prospects are on a balance.
Zambia can continue to perform well economically if such an opportunity coupled with the rising copper prices is handled carefully. If not careful and with poor choices, Zambia could fail to make the most of this opportunity and experience slow economic growth.
Yet, food prices are not the only challenge affecting Zambia and the global community at the moment. Events in the energy sector and the exchange rate have also come into play.
The problems in the energy sector have clearly arisen out of poor planning that lead to deficient power output for existing and rising demand for energy. This has materialised even more so in the last seven months; crippling the ability of sectors to increase productivity.
In the case of the free-floating exchange rate, the Zambian Kwacha has enormously gained strength against major currencies. This has been good development for those on one side of the coin. Importers of raw materials and those with financial support for capital investment through importing equipment are content.
Unfortunately on the other side of the coin, this remains a bitter pill to swallow for both export manufacturers and exporters of non-traditional commodities, especially in agriculture.
Being a country with a relatively good weather pattern and good arable land with surplus labour in close proximity, this can be our opportunity to harness our potential from the current rise of food prices.
But how can this be done?
Contemplation and research on this issue at the Jesuit Centre for Theologcal Reflection (JCTR) has informed us that the answer will mainly lie in two major goals that Zambia should strategically have in order to respond to the challenge of rising food prices: to increase and sustain production of agricultural food crops, and fill our reserves and export the rest.
The main problem has been in implementing policies to make agriculture a core sector for trade. By doing so, growth and development will survive beyond mining.
Food prices are subject to the cost of inputs as the recent concern of rising oil prices and fertiliser prices has shown.
We will focus on fertiliser rather than the impact of rising oil prices because oil deserves independent analysis. The cost of fertiliser has increased four-fold in Zambia, reaching an average of K200,000 (in some cases K250, 000 in North- Western Province) from K60, 000 in 2007.
As food costs are in part being driven by the market shift to using food crops in the production of environmentally friendly fuels, increasing fertiliser costs are as a result of a competing demand between the energy and food sectors.
Factors influencing this have been an increase in demand for natural gas in the energy sector as an alternative to electricity. This is because consumers in some markets find gas environmentally friendlier, cheaper and more reliable than traditional energy sources.
Since natural gas is used as an input for the manufacture of fertiliser, accounting for up to 80 per cent of the production costs, there is subsequently competition between the food and energy sector for the same input.
Secondly, major fertiliser mining firms that supply the market have not been able to adjust short-term supply to meet growing market demand to supply enough fertiliser for the food and energy sectors.
This time-lag will only be able to adjust once the expansion of mines' output capacities increase, new mines open and fertilier demand stabilises.
The third is the costs of transportation of fertiliser which are increasing as a result of escalating fuel prices, then factored into the selling price which is borne by farmers.
Fourthly, the production of ethanol from corn is subsidised by US$0.51 per gallon in the United States (US), coupled with assurance for producers of a secured market of buyers.
Such polices have encouraged the transformation of agricultural produce such as corn and their inputs (fertiliser) into raw materials for the production of ethanol. Therefore, these dual incentives following the subsidy and the assured market to produce ethanol have aggravated the competition for inputs between the food and energy sectors.
For that reason, the food-energy nexus cannot be ignored. While all these shifts are currently happening in the US and developed countries in Europe, the high prices of fertilisers will now be more adverse to the poor small-scale farmers who do not have the support or financial ability to absorb the external pressure of the international market through the domestic economy alone.
Zambia is classified by the Food and Agriculture Organisation as one of the 22 countries at high risk in so far as the high food prices are concerned.
It is in our view that an export ban can ensure food security to an extent, but in itself, it neither takes away the threat of rising food prices nor increases production. An export ban is a disincentive to producers as it sustains the notion that there is enough in the domestic market.
Producers then do not aim at maximising output because increased production will only result in lower prices on the market that will reduce obtainable revenue. Therefore, careful consideration should be given to policies in the broader context. Zambia currently has the objective in the Fifth National Development Plan (2006 to 2011) to develop the agriculture sector through trade.
Further statements indicate that there is an expectation of agro-producers to develop in the sector by diversification and value-added production.
Although it is possible to import equipment to diversify and develop value-added products in the agriculture sector due to the favorable exchange rate, a counter-incentive arises with the export ban.
The export ban de-links the producers from international markets. This subsequently has an adverse effect on agro-producers. Production in the agriculture sector is done in an open economy where the international market is the context where agro-producers make investments.
An export ban removes costs of production in the context of the international market, whereby revenues obtained are limited to the national market of the domestic economy.
This places producers at risk because the export ban distorts the actual pricing mechanism that guides agro-producers' investments and ambitions to sell to consumers with a higher purchasing power in the international economy.
Utility of an export ban has occurred as a result of an underlying problem that is not being addressed, which is, in essence, the inability to make the agriculture sector sustainably viable and efficient through policy implementation and support.
There are currently 28 countries imposing export bans. Zambia is one of them and none of these countries have been internationally supported in this, especially in the light of on-going World Trade Organisation talks, Economic Partnership Agreements' negotiations and regional trade agreements in the Common Market for East and Southern Africa and Southern Africa Development Community.
In this regard, the Government should respond to the real challenge enhancing production and the problem of fertiliser costs by finding and accessing affordable fertiliser.
In the short run, Zambia should set aside considerable resources for fertiliser. In the long run, the Government should revamp fertiliser manufacturing in Zambia and, yes, it is possible to do that.
A research done in the late 1980s and early 1990s by the Zambia Agriculture Research Institute discovered that areas such as Eastern and North-Western provinces in Zambia are endowed with phosphorus.
While Southern Province has shown significant deposits of natural gas, Zambia qualifies to undertake mining for the manufacture of fertiliser domestically.
With facilities already built at the Nitrogen Chemicals of Zambia, Zambia can take advantage at an opportune time when it is economically viable to develop the mines. This needs to be done soon in order to ensure that the next national development plan will position itself to make sustainable gains from this sector.
The answer, therefore, does not lie in new research per se, but the problem is elementary and requires implementation of already-known, well-researched policies.
If the Government was to proactively deal with food prices, the allocations to the agriculture sector would certainly reflect such commitments.
The revival of winter irrigation such as the winter maize programme of 2002 when President Mwanawasa came to power would be on the agenda.
Government would make sure that resources earmarked for improving the rural infrastructure bore fruit and storage facilities were adequately available.
While the challenge of food prices is a food security issue, it provides Zambia an opportunity to make economic gains which are vital for food security in the region and human development.
(Muyatwa Sitali is a programme co-ordinator of debt, aid and trade programme while Humphrey Mulemba is a programme officer for trade and capacity-building for the Jesuit Centre for Theological Reflection).
Education Permanent Secretary Lillian Kapulu is threatening to blacklist newly-recruited teachers who refuse to take up rural appointments. This comes after her announcement that 600 vacancies were not taken up in rural areas last year.
A baffling approach to resolving the problem of teacher shortage in rural areas. Surely a more rational approach is to first ask why teachers don't want to work in rural areas and then consider the incentives that are needed to make them go there. Those incentives have to bear in mind that we want teachers to be in places that they are happy to do either for monetary reasons or non-monetary reasons (e.g. place attachment).
Its quite obvious that teaching in rural areas is unattractive due to lack of services. Rural teachers therefore feel that their wages do not compensate for the loss in "quality of life" (the flipside of course is their real wages may be better because of low inflation). What Lillian should be thinking about is how best to compensate them for that financially. Introducing penalties may seem to solve the problem in the short term (though she'll still end up with less committed rural teachers), but in the long term it will simply make teaching less attractive to the best people with other employment alternatives.
Thursday, 10 July 2008
There are cycles in fashion in everything, so it shouldn't be a surprise to find that it's true of development policy in Africa too. And now, after twenty years in the doldrums, agriculture is back in the frame as the continent's most pressing problem. Not surprising when, as last month's UN Food and Agriculture Organisation crisis meeting on food prices was told, for thirty years food production has failed to keep pace with population growth (and much of the growth has been attributed to bringing more land into production), while farm productivity is a quarter of the global average, 30% of the population is malnourished and more than 200 million people in the region are chronically hungry.
But it's not the first time Africa has been challenged to create a green revolution. Attention turned away from agriculture partly because turning it round seemed such an intractable problem. Development foundered on a mix of over-ambitious state-backed schemes like the attempt at large scale ground nut production, or Nyrere's back to the village approach, while traditional forms of landholding complicated attempts at rationalising production.
Now a new crop of NGOs is in the field: there is the Kofi Annan-backed Agra, the Alliance for an African Green Revolution backed by $150 million of Rockefeller Foundation cash. Agra argues that a 1% growth in agriculture produces a 1.5% growth across the economy and it's trying to combine science and research with the needs of agricultural business and farmers to provide the equivalent of the technological inputs that triggered Asia's transformation.
Other organisations, like the International Assessment of Agriculture, Science and Technology focus on an environmentally-friendly approach to agriculture. They propose, for example, paying small holders not to drain wetlands or clear forest.
There are good reasons to expect agricultural growth to reduce poverty. Farming tends to be labour-intensive, creating low level, local jobs. Agricultural development raises returns to land, one of the few assets that the many rural poor in Africa have. Moreover, growth of food output should push down the price of staple foods, to the immense benefit of the poor who even in rural areas are overwhelmingly net buyers of food.
Parts of sub-Saharan Africa could be a breadbasket. But in the world's second largest continent, both climate and soil conditions vary enormously. In most countries infrastructure, markets and financial instruments are underdeveloped. Governance is erratic and has been damagingly influenced by the financial orthodoxy of international institutions like the IMF that dried up state support for the kind of public agricultural research and support that ensures European farmers keep up to date with the latest developments. There is no simple solution to Africa's under-production of food stuffs, nor is there a single answer that will bring food security to everyone.
But nor is it right to present African agriculture as one unremitting disaster area. It is vital to the region's economy. According to the latest UN report it contributes at least 40% of exports, 30% of GDP, up to 30% of foreign exchange earnings, and 70 to 80% of employment. Of the thirty fastest growing agricultural economies, the UK-based Overseas Development Institute points out, 17 are in Sub-Saharan Africa.
So, major investment in agriculture should pay off both in terms of food security at a time of soaring food prices, and in terms of national economic development. The debate now focuses on where that investment should go.
Most agrarian revolutions have seen a huge displacement of people from the land. Larger farms mean better returns on investment, economies of scale and leaps in productivity. There are voices arguing for a similar approach in Africa. Jon Maguire of Cru Investment is claiming astonishing results from his 3-year old project to develop commercial paprika-growing on the shores of Lake Malawi. The project, which now directly employs 2000 people and has a further 8000 families working as 'outgrowers', began with the idea of a food aid programme but swiftly turned into what Maguire says is both a poverty-alleviation programme and a global investment opportunity, all from the basis of taking a ten-year lease on 120 hectares of land and irrigating it instead of waiting for the rains.
But most African governments, according to private conversations with development organisations, are deeply suspicious of any move that takes people off the land. The failure of other parts of the economy to develop – manufacturing, for example – means there are few alternative jobs and the destabilising effects of a workless population living in shanty towns on the outskirts of capital cities are all too familiar.
So attention instead turns to how to increase productivity among what are mainly subsistence farms, and the debate turns to the role of technology and the complicated balance of simultaneously involving farmers in key decision-making while broadening horizons about new techniques and technologies.
In an interview in the Financial Times, Maguire argues that the traditional focus on small farms is wrong. Increasing profits depends on access to global markets which he offers his network of outgrowers through the scale of the central, irrigated land.
But in many parts of Africa – especially Uganda – the system of land tenure would make any accumulation of land impossible, even if Maguire's controversial prescription is right in some circumstances. In Europe, the profitability of small farms has been sustained through the Common Agricultural Policy, a fact that has not gone unnoticed by the Organisation for African Unity. It has recently prepared a report but it sets out such a raft of difficulties – incompatible legal systems, trade barriers, lack of infrastructure – that at best it is a medium to long-term prospect.
Steve Wiggins of the Overseas Development Institute warns that the new attention being paid to African agriculture bears risks: a tendency to reinvent the wheel, to hail ideas that have tried and failed in the past, and to set up false choices about, for example, biotechnology or organic, or town versus country. Wiggins, who has a lifetime experience in studying agricultural development in Africa, says progress depends on much more than enabling farmers to increase output and establishing a stable economy. The role of the state will be essential – directly, through agricultural research and development, but also indirectly.
There has to be sustained, long-term investment in road-building and road and rail transport, and a stable environment that encourages risk-tasking, and being prepared to intervene to ensure continuity of demand. Above all, though, governments will have to be prepared to be flexible – foregoing the charms of the single, national agricultural plan in favour of the local and the specific. That is the only way to get the best from Africa's diverse conditions. If the Maguire scheme really is as good as it appears, maybe in some circumstances at least, big farms and foreign capital really are the best short-term option.
A bit of family promotion. I encourage you to check out the new company lauched by my nephew Herman Kunda (and Zambian Economist "guest blogger"). Particularly excited about this project because its quite innovative and shows the many opportunities that are there for Zambians as the economy expands.
If you are interested in investing in the company or want to learn more, drop me an email or contact Herman directly.
A strong hint from Rupiah Banda earlier this week that perhaps the government is finally realising that being landlocked need not be a curse. What you need is a smart transport policy that reduces the transport costs by leveraging your advantages:
"For many years to come, the cheapest route from the eastern to the western coast of this part of Africa and vice-versa is potentially via Zambia especially once we have been connected to Angola. This is why we are looking for partners to develop inland and dry ports as well as air cargo hubs....."
The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation.
For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top.
Though neo-liberals do not want to admit it, their ideology also failed another test. No one can claim that financial markets did a stellar job in allocating resources in the late 1990’s, with 97% of investments in fiber optics taking years to see any light. But at least that mistake had an unintended benefit: as costs of communication were driven down, India and China became more integrated into the global economy.
But it is hard to see such benefits to the massive misallocation of resources to housing. The newly constructed homes built for families that could not afford them get trashed and gutted as millions of families are forced out of their homes, in some communities, government has finally stepped in – to remove the remains. In others, the blight spreads. So even those who have been model citizens, borrowing prudently and maintaining their homes, now find that markets have driven down the value of their homes beyond their worst nightmares.
To be sure, there were some short-term benefits from the excess investment in real estate: some Americans (perhaps only for a few months) enjoyed the pleasures of home ownership and living in a bigger home than they otherwise would have. But at what a cost to themselves and the world economy!
Millions will lose their life savings as they lose their homes. And the housing foreclosures have precipitated a global slowdown. There is an increasing consensus on the prognosis: this downturn will be prolonged and widespread.
Nor did markets prepare us well for soaring oil and food prices. Of course, neither sector is an example of free-market economics, but that is partly the point: free-market rhetoric has been used selectively – embraced when it serves special interests and discarded when it does not.
Perhaps one of the few virtues of George W. Bush’s administration is that the gap between rhetoric and reality is narrower than it was under Ronald Reagan. For all Reagan’s free-trade rhetoric, he freely imposed trade restrictions, including the notorious “voluntary” export restraints on automobiles.
Bush’s policies have been worse, but the extent to which he has openly served America’s military-industrial complex has been more naked. The only time that the Bush administration turned green was when it came to ethanol subsidies, whose
environmental benefits are dubious. Distortions in the energy market (especially through the tax system) continue, and if Bush could have gotten away with it, matters would have been worse.
This mixture of free-market rhetoric and government intervention has worked particularly badly for developing countries. They were told to stop intervening in agriculture, thereby exposing their farmers to devastating competition from the United States and Europe. Their farmers might have been able to compete with American and European farmers, but they could not compete with US and European Union subsidies. Not surprisingly, investments in agriculture in developing countries faded, and a food gap widened.
Those who promulgated this mistaken advice do not have to worry about carrying malpractice insurance. The costs will be borne by those in developing countries, especially the poor. This year will see a large rise in poverty, especially if we measure it correctly.
Simply put, in a world of plenty, millions in the developing world still cannot afford the minimum nutritional requirements. In many countries, increases in food and energy prices will have a particularly devastating effect on the poor, because these items constitute a larger share of their expenditures.
The anger around the world is palpable. Speculators, not surprisingly, have borne more than a little of the wrath. The speculators argue: we are not the cause of the problem; we are simply engaged in “price discovery” – in other words, discovering – a little late to do much about the problem this year – that there is scarcity.
But that answer is disingenuous. Expectations of rising and volatile prices encourage hundreds of millions of farmers to take precautions. They might make more money if they hoard a little of their grain today and sell it later; and if they do not, they won’t be able to afford it if next year’s crop is smaller than hoped. A little grain taken off the market by hundreds of millions of farmers around the world adds up.
Defenders of market fundamentalism want to shift the blame from market failure to government failure. One senior Chinese official was quoted as saying that the problem was that the US government should have done more to help low-income Americans with their housing. I agree. But that does not change the facts: US banks mismanaged risk on a colossal scale, with global consequences, while those running these institutions have walked away with billions of dollars in compensation.
Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well. Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.