Clive Chirwa puts the quest for manufacturing at the heart of his Zambia's recovery plan. A much improved contribution than we have previously seen from him (previous contributions can be found here, here and here):
Zambia’s recovery plan, Part II: the stimulus plan, Clive Chirwa, The Post (subscription), Commentary :Up until earlier this year, ‘globalisation’ or ‘investor attraction’ was the word on everyone’s lips and was regarded as God send to African countries that at last saw real money being pumped into their economies. The big multinational corporations, market speculators, opportunists for quick bucks and just investors propped by their nations jumped on the band wagon to Africa. Many countries including Zambia bent backwards in pampering them with incentives.It is now clear that “investor attraction” has failed to rid the world of poverty according to a number of economists in Europe, Japan and USA. Rather than being an unremitting force for our development, “investor attraction” has shown its true colours by abandoning us at the slight drop in commodity prices and hence partly precipitating our recession. This shows how multinationals have become more powerful than governments, controlling global financial institutions that have marginalised the likes of IMF and World Bank, making their own rules and regulations, and walking into and out of our lives whenever they feel convenient. Hence, fuelling the “race to the bottom” as Zambia searches to attract and retain investments. Meanwhile the so-called “investors” are taking advantage of this crisis to cut jobs and then skim off huge profits while paying very little tax.I believe in a free market economy and Zambia should embrace every potential contributor to our development. But what this crisis is showing us is that there are some core businesses of a nation that require the tight control of government. In Zambia’s case natural resources are key to our survival since they provide about 90 per cent of our revenue with copper at the top bringing in about 70-80 per cent of that income. Zambia’s total dependency on copper raw material means that every time its price, set far away in London, fluctuates, it takes the kwacha’s value with it and the people suffer. The exchange rate has followed closely changes in copper prices for decades. What we want is to urgently decouple the kwacha value from copper price. We can do that very easily by innovating and therefore take our copper to finished products, while at the same time proactively creating a market for them. If we do not do that, large negative effects are expected in output, fiscal and external accounts, and in the financial sector. According to the Word Bank, our account deficit is expected this year to reach 10 per cent of GDP. Two years ago in 2007 it was just 4 per cent. The fiscal deficit has already worsened, led by the low copper revenues and will become worse to reach 3 per cent of GDP this year. The financial sector on the other hand is showing some signs of exposure to domestic and international downside risks. This is how the effects of global financial crisis are affecting Zambia.Our international reserves, which were nicely and conscientiously built by our government through good governance and prudence are dwindling fast, falling by 28 per cent since their peak of $1.4 billion in July 2008. We must stop this depletion of our reserves by seriously looking into innovation and some slight diversification of our main income spinner wherever appropriate.Indeed the World Bank has now concluded that for Zambia to survive in the long term, and eradicate poverty, it must diversify its attention from raw material export. By doing so our country will rise again to the growth levels of 6 per cent that we saw happening up to July 2008 and we shall surpass that as our economy structure changes from mono to multi.In addition to this, we must make sure that this time, our government plays a bigger role in initiating our growth. I have been saying this for years that nobody will come to develop our country. It is our duty as Zambians to do so and not to totally depend on investors who are just temporary participants and heavily governed by the “Invisible Hand” theory first coined by the father of capitalism Professor Adam Smith. According to Professor Smith, this is a concept showing that people act in their own interest and not all self-interest has beneficial effects on the community.Recently I was invited to Oslo in Norway, the only country in the Western World still recording growth. During lunch we touched upon the economic prowess in this downturn. A comment was made by a good Norwegian friend that “it is a great pity to see Africa not moving at all since the 1960s. Before, it was the British and the French who milked you and now it is the Chinese taking over. Open your eyes, how can you allow to be constantly chocked. It is euthanasia for a nation like Zambia. Look at Norway, our government controls all the North Sea oil reserves to finished products. Our capitalism is different. We believe in private enterprise and free market, but when it comes to natural resources the government makes sure it controls that. This is why we have built $360 billion in reserves. We enjoy a surplus of 11 per cent and our ledger is entirely free of debt, while the USA has a deficit of 12.9 per cent of GDP and $11 trillion in debt. Our GDP per capita is $52,000.If we left it to investors, we too, would have been milked by oil multinationals”.It was extremely embarrassing to hear the naked truth; hence I dropped my eyes to avoid contact as I was saying to myself “he is right”. Why can’t we do it ourselves and move out of this self-imposed misery? We have been independent for more than 44 years, but our economy and development has barely moved from the position left to us by the British. It is as though we have been in a coma or hibernation for all these years. That is why I am now seriously advocating using this opportunity of the economic crisis to wake up and really make sure we put up a stimulus plan for us in the short, medium and long term. This time we should not be arm-twisted by the IMF and World Bank to liberalise our economies as we adjust our fiscal structures. We must also improve our current GDP per capita that stand at $1,400 and go back to our path of growth that stood at 6 per cent to greater heights.The only way we are going to resume the better days and go beyond those yesteryear targets is to build up our international reserves once more through a prosperity route that is stipulated in our stimulus plan. This involves expanding and redesigning the means we generate income. The question is: how is Zambia going to respond to this downturn?Zambia is not USA, Britain, Russia, German or other countries that have provided multi-billion dollar stimulus plans. We just do not have that sort of money. But we are extremely rich in natural resources despite being poor on the balance sheet. Our challenges are much more complex than other African countries in the sense that we are landlocked, we have inadequate access to markets, poverty is too high, we are too weak in fiscal strategy and dependent on pie-in-the-sky investors to come and show us how to do things. Because of these challenges, Zambia needs a stimulus package to mitigate the contagion of this crisis that originated from the developed world. Our stimulus should properly integrate sets of trade, monetary and fiscal measures. This will provide assistance to facilitate economic adjustment and nurture our investments in human and physical capital. The stimulus plan should provide and support appropriate safety nets for those most vulnerable and most exposed to the crisis such as the mining sector and their suppliers. The private sector and particularly the small and medium enterprises should be propped as they will be the ones to create wealth necessary for poverty reduction once they have been shown the way by giving them innovation tools.Zambia must not be complacent as to rely on the G20 aid package to Africa of $20 billion plus 0.7 per cent of the stimulus of the developed world to “vulnerable fund for Africa”. It is time we started living in the real world by abolishing the counting of aid as our income in our national budget. This is totally unacceptable and must be deleted in future budgets. Income is something you earn and the stimulus plan here must reflect that.In the absence of real mega external resources, Zambia should contemplate a modest fiscal stimulus as the way of propping up the economy’s growth. It is unlikely that tax reductions will yield great gains in growth, as many of the efficiency-reducing taxes have already been reduced through enormous unemployment by companies who have gone bust and by those investors who want to maximise their profit. So our major gains will come from expenditure increases. How this is spent is extremely important. Building a conference centre and a football stadium now is ill advised. For the simple reason that although jobs are created in the short term these do not add value to future jobs creation because no money is being made for re-investment. Priority in government expenditure must become the driver the take us out of this recession. This money would have been better utilised in building the manufacturing base. We will come to that later.In this downturn, the stimulus plan should be able to create jobs and support those existing jobs that are under threat. The more people work, the bigger is the take home pay for the government in the form of PAYE, corporation tax and royalties. To be blunt why not re-acquire some mines into ZCCM? Norwegians, Russians and now USA, Great Britain, Germany are all doing it. Western governments running banks, car industries, mines and so on was never on the vocabulary of those nations. But we are in extraordinary times, and Zambia must now recoup what belongs to the people, that is the only way we will generate reserves towards the sizes of Norwegians and Chinese.The stimulus should also be directed at real maintenance and construction of infrastructure such as roads, energy or electricity grids, water supply, and the long-term neglected railway system. As a land locked country our railway system needs to be re-built. The longer we leave it the more expensive it will become. Without us having these infrastructures performing perfectly, there will be no development. This is our chance to spend while in the downturn so that we are ready for the big things to come when the market and the world economy is on the upturn. This action will create real jobs. Spending $200 million on non-revenue spinning enterprises like a football stadium and business centre in this downturn is an absurd and myopic strategy. I know His Excellency never made the decision. Wisdom is now required to achieve the most effective sequencing to ensure the stimulus create and stimulate a multiplier effect in sectors with highest potential.That is why I believe manufacturing is at the top. Many people in Zambia have said we should go the agriculture route. I have a problem with this despite that agriculture is essential. But this will never lift Zambia out of poverty or even create an economic transformation. Agriculture will never employ more people than manufacturing will.The world around us has shown for instance that Great Britain and America each has 1 per cent and 3 per cent respectively of their total population employed in agriculture and they feed 65 million and 260 million respectively. As you can see agriculture is not a job creation sector, indeed what we want is to mechanise our agriculture and make it more efficient so that we are be able to have two if not three harvests of maize, wheat and other farming products per year. This will boost food reserves and security.For development and for the purpose of taking us out of the recession, we need stimulus package in ventures that guarantee increasing returns to scale. This is manufacturing, not agriculture or tourism. It is time that our dependency on primary products takes another level to value adding ventures which will create more jobs and expand the revenue base.We know that Zambia has in the past been growing by 6 per cent. This was because of high copper prices and therefore it was a myth development. If you want to see the real growth, it is better to compare countries by what they made their money from. You will find that high-growth economies have vibrant manufacturing sector. The output shares of manufacturing in national income and exports are good indicators. In Africa, South Africa ranks en par with developed countries in economic terms because of the manufacturing capacity. Zambia had a good percentage of 32 per cent in 1990 as contribution of manufacturing to GDP. This has dropped tremendously after privatisation and we need to go back to that and beyond if we have to develop further. Only this time our manufacturing must concentrate on value addition in copper and other natural resources sold as raw materials.People might ask, why should we go for manufacturing? It is well established that the sector is superior in productivity increases, economies of scale and spurring all-round linkages. The sector is a big stimulus incentive as it also demands and absorbs a mix of high- and low skilled labour. Only manufacturing will save us. We must really do it in a planned manner to have maximum impact. Like in Norway, I would like our government to create prime value addition industries in copper, cobalt and nickel based industries. Then after that, private entrepreneurs will build up supply and converter chains. A think tank should identify the necessary products and next week I will show you a lot of those that have very high value additions despite using very little base material. Do not miss the third part of the Recovery Plan - The Execution Strategy. You might find some ideas for your business.