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Sunday, 1 February 2009

Zambia Budget 2009, Politicians respond..

The Opposition has drawn first blood on the budget.

It was also interesting see that they appear to have picked up what I have always said about the Zambian version of MFEZs. Unlike the East Asian models we were led to believe they are based on, the Zambian version asks the tax payers to provide large chunks of infrastructure. I suppose the government feels that large tax breaks are not enough to incentivise "foreign investors".

Update (2 Feb 2009) : Some heavy weight questions from Former Finance Magande. The comments on mining and agriculture are particularly interesting. It appears the former Minister has had something of the road to Damascus experience since he left office!

12 comments:

  1. May I be allowed to comment on the MFEZ issue. Anyone who has been involved in promoting investment into Africa appreciates the fact that infrastructure has been one of the biggest hundles in attracting investors. Asia and in the ealry stages of development Euope have used special economic zones. If funds were not limited that would the kind of infrastucture that would be put up in the whole country. with limited funds one needs to start some where and the special zones have been used the world over.

    With regard to incentives you will be supprised to know that even the USA offers incentives, all this talk about stimulas package, tax cuts, are incentives targeting the same investors Zambia is targeting. People percieve incentives as revenue loss to the Government because they count chicks before eggs hatch. How can Govt lse revenue from a company that has not yet invested

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  2. Anonymous,

    The problem is that the idea of attracting foreign investment before developing the economy is putting things on it's head.

    Anyway, the way MFEZ's work, is if there is a linkage to the local economy, through the use of local suppliers only. The more local suppliers there are available, the greater the impact on the economy, and the fewer there are, the less the actual impact, because these foreign businesses are not taxed, don't share profits, and are not forced to reinvest their profits in the local economy.

    Now if there was a specific government policy to train up and use Zambian SME's as suppliers, at least these zones would make some sense.

    But considering this is a neoliberal government, they believe that 'the market will provide', somehow. It doesn't, and the end result is that these are just foreign businesses doing business in Zambia, rather than being part of the Zambian economy.

    GDP appears to have gone up because of the increase in activity within the country, but that is just window dressing. It keeps the IMF happy though, and pats on the back for the government are bound to follow through good ratings and more loans.

    The multiplier effect of these businesses is minimal, unless these foreign businesses are forced to use Zambian suppliers and the government invests in universal education.

    That's what happened in Malaysia.

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  3. For as long as there is no stimulus package in terms of citizenship economic empowerement aimed at indieneous zambian entrepreuneurs (both in Zambia and those in the diaspora but willing to return), economic growth in Zambia will not be sustainable. Govt and the Mines were the main employers 20-30 years ago. They still are. Somebody has been missing the plot somewhere and until policy makers and empowerment vehicles realise that only smart entrepreuneurs with existing businesses create jobs (and not Govt), we shall continue to be a nation of workshop and seminar attendants hoping to get rich on per diems instead of real wealth creation by hard working entrepreueuners who have put their own money on the line to create businesses. All they need is a lift to get to the next level. As someone once said to me, getting money out of a bank in Zambia is like pulling a whole set of teeth. It is very painful!

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  4. Anonymous,

    I agree with you. Countries with limited infrastructure and resources should leverage the resources of others to create economic growth at home.

    Regarding forcing businesses to use Zambian suppliers, this could work if there were already many established MFEZ companies with strong incentives to stay in Zambia, however it would only work to a certain extent since there is a global competition for these companies and they could always move elsewhere. Forcing companies to do something for economic reasons is generally not a good idea, better for the suppliers to prove themselves as competitive producers of goods and services or look for new markets.

    It is good that the Zambian government is looking around the world for new ideas to grow the economy such as movie tax rebates. A good example of practical and tactical economics in todays dynamic and changing world.

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  5. Kafue001,

    Regarding forcing businesses to use Zambian suppliers, this could work if there were already many established MFEZ companies with strong incentives to stay in Zambia,

    How would that make a difference? Now if there were already many (and better) Zambian suppliers, it would make sense not to (have to) force FDI to use them, because they would already opt to use them - in theory. In practice, they would already have business arrangements with their own cousins and governments, and for instance bring in Chinese workers for that reason alone.

    however it would only work to a certain extent since there is a global competition for these companies and they could always move elsewhere. Forcing companies to do something for economic reasons is generally not a good idea, better for the suppliers to prove themselves as competitive producers of goods and services or look for new markets.

    Then why have the government involved at all, including having the government involved in attracting foreign investors? I mean, if FDI is just making good business decisions, why get the government involved in attracting them? What would the need be?

    If the governement wants to make Zambia an attractive place to do business in, why only do so for FDI, and not for Zambian businesses? How does that make sense?

    If the government is the problem, why do all these failed neoliberal businesses look to the government, when they are in trouble?

    There is a good documentary on the fallacy of neoliberal theory itself, called The Trap - see Youtube:

    BBC - The Trap 1

    I think you have just made the (neoliberal) case against government involvement in any part of the investment process, including attracting foreign investors.

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  6. I would like to refer the bloggers to an IMF article published in September last year.

    http://www.imf.org/external/pubs/ft/fandd/2008/09/nellor.htm

    In it the IMF classes Zambia and 7 other nations in sub-saharan Africa (SSA) as the next Frontier Markets (emerging markets). It compares SSA with the ASEAN countries in the 1980's when their economies were where the 8 SSAs are today. Infact the SSAs are better placed than the ASEAN countries were in 80's.

    The main emphasis there is that growth has to be led by private capital coupled with strong and regulated financial markets where foreign investors can by in to the financial markets.

    It is for this reason that i commend the Government in its quest to revamp the infrastructure to allow businesses, both existing and potential to tap in to areas not in the current economic mix. The old adage' where road leads, development follows can not be more true than in Zambia today.

    The ground work has been done in both macroeconomics and fiscal stability in the last 10 years. The emphasis now has to be on an industrial age (value adding) and that is when the growth in Zambia will really take of.

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  7. Zamibian,

    Welcome!

    We have discussed this before. See Africa's "Frontier Markets".

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  8. Mr K,
    "How would that make a difference?" (MFEZs)

    It would make a difference because the MFEZs would be making good profits and thus may decide that it is worth investing in training Zambian suppliers to produce goods and services they need and which the suppliers currently do not produce, rather than simply buying it from other readily available sources.

    Mr K,
    "Then why have the government involved at all, including having the government involved in attracting foreign investors?"

    The government should be involved in the roles traditionally played by governments - i.e. attracting investment (since other countries also give incentives to attract investment because there is a global competition for jobs) and developing infrastructure. They should not be involved in running businesses in the long term because they do not have the expertise for that.

    Mr K,
    "If the governement wants to make Zambia an attractive place to do business in, why only do so for FDI, and not for Zambian businesses?"

    The incentives are targeted to FDI because they have the access to substantially larger amounts of capital and expertise that can create more jobs than local businesses can. The government can do other things such as education and training for local businesses, however it has limited resources for items such as capital lending.

    Mr K,
    "If the government is the problem, why do all these failed neoliberal businesses look to the government, when they are in trouble?"

    The government is the problem when it plays long term roles in functions in which it is not good at, such as running companies. It is good for macroeconomic functions such as restoring stability to the economy and short term market interventions.

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  9. Kafue001,

    It would make a difference because the MFEZs would be making good profits and thus may decide that it is worth investing in training Zambian suppliers to produce goods and services they need and which the suppliers currently do not produce, rather than simply buying it from other readily available sources.

    You're saying that foreign companies would start using Zambian suppliers if the foreign companies were making good profits?

    What would their profitability have to do with their choice of suppliers?

    Could you give a real world example of this happening?

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  10. Mr K,
    "Could you give a real world example of this happening?"

    A good example would be the economic boom in Australia in the mid 20th century. Government decided to impose rules on automakers to use local content, automakers complied because they were making good profits during the boom:

    http://en.wikipedia.org/wiki/Economic_history_of_Australia#1939_-_1974

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=632693

    However this led to adverse effects on the industry later because of the resulting uncompetitive products.

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  11. Kafue001,

    Quoting the entire relevant section from the Wikipedia link:

    1939 - 1974
    The highest growth in the manufacturing sector was found in the period after the end of the Second World War. Import restrictions implemented by the government of the time led to increased profits to the manufacturing industry, which encompassed a wide range of industries including motor vehicles, metal processing, TCF (textiles, clothing and footwear) and chemicals. The impetus, for the most part, was U.S. investment in Australia. The manufacturing industry was bolstered only to serve the domestic market, led by economic policy makers who implemented “import replacement” strategies. This was afforded by continuing increases in both productivity and economic protection.

    In the 1950s and 1960s, Australian manufacturers which were nurtured by government policy failed to increase productivity. This was highlighted by the increases in the productivity of overseas manufacturing who did not have the same level of protection as Australian producers. Foreign investors noticed this lack of competitiveness and investment declined in the manufacturing sector.

    Economic growth was not hampered by this, as the development of mining initiatives to exploit Australia’s natural resources attracted foreign investment, which underpinned economic expansion. This establishment of a mining industry continued the high level of economic growth in the post-war period.

    1974 was the end of the "long boom".



    What I have a problem with, is that there are many articles written about trade protection that have a strong bias against intervention and for what they call 'free trade' - they use invective to describe the other side, and use words like 'cult' as in 'the cult of protectionism' (one actual title).

    The Wikipedia article simply gives the writer's opinion, without referencing any links or source at all.

    However, here are some basic figures for Australia:

    Australian Manufacturing, 1968-1988: Recession, Reorganisation and Renewal by David C. Rich Phd, School of Earth Sciences, Macquarie University, NSW 2109, Australia

    By the end of World War II, manufacturing had become a major sector of the Australian economy, employing 27.2% of the workforce in 1947. [The Zambian equivalent of that would be 1.36 million people of it's 5 million strong workforce - right now 58,000 are employed in mining - MrK] During the postwar boom of the 1950s and 1960s manufacturing played a leading role in the country's rising prosperity. Between 1947/48 and 1967/68, with heavier and more advanced industries such as steel, chemicals and electrical equipment expanding especially rapidly (Linge 1987).

    By the time the 1950s came around, Australia's manufacturing sector was already reasonably developed (I'm sure also under the influence of WWII).

    As of now, Zambia can only dream of having 1.36 million people employed in manufacturing, and as such, any fears of inefficiency caused by protectionism after that landmark has been achieved seem to be misplaced.

    I think there is a difference between setting up an industry and protecting this infant industry, and running an already developed industry within the context of international competition.

    When you are growing an industry (or anything), the first priority should be expansion, not efficiency.

    To quote the Wikipedia article:

    Import restrictions implemented by the government of the time led to increased profits to the manufacturing industry,

    Increasing demand by increasing wages, and keeping money circulating inside the economy instead of sending it abroad should be the priority. Re-investment is also the mantra preached by Warren Buffett, who used it to grow his massive fortune.

    On the role of reinvestment, please check out:

    Black Economics, by Jawanza Kunjufu and
    Powernomics, by dr. Claud Anderson

    Kunjufu's book is about community reinvestment, and Anderson's book touches on the importance of setting up vertically integrated economic sectors.

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  12. Windfall what wahat whaat! In the national budge. Move out minerals and stick to parties you belonged to before the agreement.

    ReplyDelete

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