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Tuesday, 31 March 2009

Linking Zambia (ZAMACE)

A fantastic development. ZAMACE our only agriculture commodity exchange has been trading for while but it has now gone electronic and has set up a new website to facilitate such. (HT: Mrk).

I sing the praises of ZAMACE in a previous post - Exchanging towards agricultural prosperity...

The business of human trafficking...

Zambia is generally considered a transit hub for human trafficking in the region thanks to its unique geographical position. Apparently what we have failed to become for air transport, the smugglers have beenable to achieve for human trafficking. I have been meaning to do a blog on this, but missed the chance last year when this story came out. For this reason, when I stumbled on this latest paper "The Economic Drivers of Human Trafficking: Micro-Evidence from Five Eastern European Countries" I could not resist sharing. Although it focuses on Eastern Europe it has some interesting conclusions that may have wider implications (and applicability) :

First, migration networks may not always be beneficial for migrants. Although we cannot directly assess the role of networks, this tentative conclusion can be drawn by combining our result that trafficking primarily occurs where migration flows are largest, and access to networks relatively easy, with the anecdotal evidence that many trafficked victims are recruited through personal relationships. Our finding on the ambiguous role of migration networks stands in some contrast to the existing migration literature, which generally advocates a risk-reducing role of networks. More research is needed to better understand the role of network heterogeneity for migration and trafficking.

Second, policy measures to counter human trafficking and related awareness campaigns should mainly be targeted to areas where migration rates are high or on the rise, not to remote areas with no or little migration. Our indicative findings on the role of risk awareness and information use give some reason for optimism that anti-trafficking campaigns and measures to reduce information asymmetries in the migration process can be a promising way to reduce the incidence of trafficking. Besides awareness campaigns, the ILO (2005) suggests to set up labour market information systems on jobs at home and abroad and the general use of model employment contracts.

Third, our results document the strong link between illegal migration patterns and trafficking. Restrictive immigration policies certainly add to the problem by pushing would-be immigrants into illegality. Nonetheless, illegal migration movements may rather be a complement to, rather than a substitute of legal migration flows (Hanson and Spilimbergo 1999, Amin and Mattoo 2006). If this is true, the pool of migrants at risk would not necessarily be reduced through a moderate increase of legal migration opportunities. In addition, traffickers’ incentives would remain unchanged through such measures.

As a general conclusion, it seems likely that the market of human trafficking and the number of victims will continue to grow as long as migration pressure remains high.

I was also particularly struck by the vastness of the human trafficking business, which helps to explain perhaps why nations such as ours may struggle to completely eradicate the scourge :

All available evidence indicates that human trafficking is an exceptionally lucrative business for criminal groups. In a recent study, the ILO (2005) estimates that sexual and labour exploitation yields US$ 32 billion of profits a year to the actors involved. This corresponds to an estimated US$ 13,000 of yearly profits for each forced labourer. Another estimated figure is the profit of criminal gangs from sex trafficking alone, which is conservatively estimated at US$ 5 to 7 billion a year, with Interpol giving a higher estimate of US$ 19 billion annually (ILO 2005, US State Department 2008).

Press Notice : Zambia Diaspora Connect

Zambia Diaspora Connect released today the following statement :

Immediate Release : Government Engagement of Diaspora

31st March 2009 : Zambia Diaspora Connect has been successful in its discussions with government on the Diaspora contributing to the National Indaba to take place on 4-5th April 2009 in Lusaka. The Indaba's theme is "Global Economic Crisis, a Wake-up Call for Transformation". The government has responded positively and in a serious sign of intent with regard to Diaspora engagement, has invited the Diaspora to participate in the Indaba. Zambia Diaspora Connect will lead this team to be headed by Mr. Chasaya Sichilima (our Business and Government Liaison Officer) from Canada and Mr. Paul Lupunga from Australia.

They will be accompanied by Mr. Simon Sakala from Japan, Ms. Ing'utu Palmer from England and Mr. Kazhila Chinsembu from Namibia. Zambia Diaspora Connect included Zambians from other networks in the Diaspora to broaden inclusiveness of the contribution. This opportunity will also be used to present the government with the paper resulting from the Diaspora e-Conference held in October of last year. It is intended that the report will be made available to everyone by the end of this week.

Mr Chasaya Sichilima hailed the development as “a marked positive shift in government and shows that whatever efforts all of us in the Diaspora have been making to ensure our voice is heard in the country's development are beginning to bear fruit”.

Zambia Diaspora Connect considers this first step as vital to surmounting the challenges of our beloved nation.

Zambia Diaspora Connect is a non governmental organisation. It works in partnership with Zambia Diaspora organisations across the globe, Government, civil society, the private sector and others. It also works with multilateral institutions, including the World Bank, United Nations agencies, and the African Union. Further information can be accessed at http://www.diasporaconnect.blogspot.com/

A real agenda for the indaba?

A thoughtful article by Pete Henriot which sets out eight key issues that should be addressed at the upcoming indaba, these naturally go beyond what the government has in mind :

An agenda for the indaba, Fr Pete Henriot, The Post (subscription), Commentary :

Another national Indaba? For what purpose? With what agenda? Who will attend? What will it cost? What will be the follow-up?

These are the questions in the air now, as the government has announced a very large gathering – all MPs, many invited organisations and individuals – to discuss Zambia’s response to the many challenges raised by the global economic crisis (GEC).

Some Zambians may have plenty of hope and pray that such a gathering will have a more specific outcome than the one held in 2003. That one had little or no significant follow-up that the general public knows about, despite four days of extended conversations with a large group around a huge agenda. Some have favourably greeted the opportunity to participate in the Indaba (hopefully not because of any “sitting allowances”!), while others have expressed pessimistic skepticism or outright boycott.

We should be learning more about the event in the next few days (with hopes that The Post will still be around and allowed to publish so that we can get a wider view of what people are saying than appears to be the prescribed position of the government’s print and electronic media!). Here are a few obvious topics that should take the highest places in any list of agenda items for the Indaba if effective responses are to be made to the impacts of the GEC.

First and foremost, the disturbing impoverishment figures shown in official government reports and demonstrated in the JCTR’s Basic Needs Basket surveys must be addressed. Yes, some figures such as infant and maternal mortality have improved – though still showing very sad conditions. But certainly it is a scandal and a moral tragedy to have so much poverty (65 per cent of our people living below the poverty line) in a country of such immense and rich resources forty-five years after Independence. Whatever one’s political party affiliation is, that is a judgment that surely would not be denied.

Moreover, the great gap between rich and poor and between urban and rural is unacceptable. The Gini-coefficient (a measurement of inequality) is 52 – and that indicates gross inequality.

Surely the search to deal effectively and equitably with this fact of the impoverishment of the majority of Zambian citizens has to be the number one agenda item for any planned Indaba.

Second, the challenge of corruption which is cancerously, destroying structures and relationships and hence undermining any sustainable development in Zambia must feature high on the Indaba agenda. The government’s recently announced Anti-Corruption Policy should be distributed to all participants and enter into all the discussions. Grand, middle and petty corruption must be more readily and effectively dealt with.

Yes, recent arrests, prosecutions and imprisonments of some government officials are encouraging. But what about the continual revelations of the Auditor General’s reports? How many persons have actually been arrested, prosecuted and imprisoned – or at least dismissed or suspended – because of these clear revelations?
Ways to implement the Anti-Corruption Policy and to find new ways of dealing with this deadly disease must be very high on any realistic Indaba agenda.

Third, there is a very great need to build public confidence in the process, content and output of the National Constitutional Conference (NCC) if we are ever to have the much promised “constitution to stand the test of time.” There can be no denying the fact that there is widespread cynicism across party lines and in the wider public that the NCC is not delivering on the promises offered by the hard work of the Mung’omba Commission – promises about electoral reform, correction of presidential powers, up-dating of the Bill of Rights to include Economic, Social and Cultural Rights (ESCR), commitment to popular approval of the Constitution through a national referendum, etc.

Therefore, high on the agenda of the Indaba must be the recognition that a new Constitution is essential to integral and sustainable development in Zambia.

Fourth, open and honest discussion of the situation of the mines will surely occupy an important place on the Indaba’s agenda. Is the Zambian citizenry really getting the full picture of what is happening at this very moment on the Copperbelt, for example, in Luanshya? I’ve been told by people actually living there that asset stripping is going on. Is that true or not?

Last week the Wall Street Journal reported that the suffering of the people in Luanshya is growing greater every day. What are the government’s plans?

Certainly the Indaba should openly debate the wisdom of removal of the windfall taxes at the very moment that copper prices are on the rise. Will the government listen and respond to voices questioning that decision?

Fifth, the Indaba should take a good hard look at the social dimensions of the proposed Multi-Facility Economic Zones (MFEZ). What are the environmental impacts of setting up these zones, e.g., close to Lusaka? What are the guarantees of good wages, safe working conditions and rights of union organising – especially if these Zones are largely occupied by investors from countries that don’t have good records on these strong justice demands on the part of workers?

Sixth, very high on the Indaba agenda must be agricultural policy in Zambia. Can discussions and recommendations at the Indaba demand higher budget priority for rural development, help sort out the mismanagement and general dissatisfaction of the Fertiliser Support Programme (FSP), and reinforce the government’s commitment to keep Zambia GMO-free?

The Millers Association of Zambia has just announced that this week the price of mealie-meal would again be on the rise - K65,000 per 25kg of Breakfast Meal in Lusaka. Higher elsewhere? Even higher later on? Something isn’t working right with agricultural policy when a lack of diversification of food stuffs means that more and more Zambians will be hungry in the days ahead.

Seventh, the agenda of the Indaba is supposed to deal with major economic development issues like the six items listed above. But it is clear that education and health issues are major contributions – for better or for worse – to economic development in Zambia. We simply won’t have a good economy in Zambia unless we have well educated and healthy Zambians! Some good steps might have been taken in Budget 2009, but much, much more needs to be done. Let the Indaba be genuinely concerned about the status of education and health care across the country, coming up with clear and manageable recommendations.

Eighth, environmental issues must also be high on the Indaba agenda. More that “turning off the lights” is required by our people and our government if global warming, droughts and floods are to be faced. The ecological challenges to the economy in Zambia are great. Let the Indaba have a green face for all that it might discuss and recommend!

So we should know by this time next week who got invited to this big event and whether the time, energy and expense will have been worth it. Much depends on the agenda chosen, the openness experienced and the follow-up designed!

Monday, 30 March 2009

A greater GRZ mining stake? 2nd Edition

The initial proposed 25% government stake in mining companies has now become "up to a maximum of 35%". According to the Mines Minister Maxwell Mwale, there are no plans nationalise the copper mines :

Zambia to raise stakes in copper mines, Reuters, News Report :

Zambia, Africa's top copper producer, will raise its stake in foreign-owned copper mining firms to up to 35 percent to have a bigger say in their running and prevent mine closures, a cabinet minister said on Monday.

Maxwell Mwale, Zambia's mines and minerals development minister told Reuters the country did not plan to nationalise the copper mines, but would negotiate with the companies and seek to convert debt owed to government into equity.

He gave no timeline on when the government would implement the move to increase its shareholdings, but said Zambia would inform mining firms of the new plan soon.

Unions have urged the government to take a bigger stake in mines to exert influence, prevent mine closures and save jobs.

Mwale said Zambia would target a stake of between 25 to 35 percent from the average of 15 percent it holds in copper firms.

"We want to have a maximum of 35 percent shareholding so that we can have influence in decision making," Mwale said in an interview. "Only by taking 51 percent would it amount to nationalising the industry."

"Even the existing mines, if they have (financial) obligations to the government, we will liquidate the obligations through converting liability into equity," Mwale said.
London-listed Vedanta Resources Plc
, Canada's First Quantum Minerals, Equinox Minerals Ltd and Glencore International AG operate in Zambia.

TARGETS

"It is desirable for the government to have at least 25 percent shareholding," Mwale said.

"We are first targeting those mines which are closing down. Any mine like in the case of Luanshya, when reselling the mine, we will have at least 25 percent."

Mwale said Zambia would offer a 75 percent stake to new foreign investors bidding to run the shut Luanshya Copper Mine (LCM), which it expects to take back from its owners by April.

LCM had been targeting copper output of 80,000 tonnes by 2010 from about 24,000 tonnes but shut its Baluba mine and Chambishi Metals Plc, the country's largest cobalt producer.

LCM also put off the $354 million Mulyashi copper project, which was due to start producing 60,000 tonnes copper in 2010.

Mwale said copper output would rise this year compared with last year, partly due to tax incentives and a stronger price.

He said Zambia's copper production this year would be above 600,000 tonnes. The country produced 569,887 tonnes last year, according to a Treasury report seen by Reuters.

Mwale said Zambia expected higher output due to stronger copper prices and the scrapping of a controversial 25 percent windfall tax.

"The price of copper has picked up significantly, we closed at $2,800 per tonne in December and now the price is at $4,000. The message is that the price is good ... the problem is they have inefficient operations," Mwale said.

Sunday, 29 March 2009

Exporting and firm performance...

On five questions on diversification, I note the importance of export diversification in increasing economic growth. Right on cue, a new article from Vox EU presents evidence from a natural experiment – demand shocks experienced by Chinese exporters due to the Asian financial crisis – which suggests that exporting improves firm performance.

Does exporting improve firm performance? Dean Yang, Vox EU, Commentary :

Participation in export markets is often viewed as a prerequisite for economic growth in developing countries. For example, in a report on the East Asian miracle, the World Bank (1993) pointed to export-oriented economic policies as a key factor behind the region’s rapid economic development. While cross-country studies document a positive relationship between trade and growth performance (Sachs and Warner, 1995; Edwards, 1998; Frankel and Romer, 1999), there is substantial controversy over whether exporting causes economic growth, or whether the causation runs the other way – from economic growth to exporting (Rodriguez and Rodrik, 2001; Irwin and Terviö 2002).

One can pose an analogous question at the level of individual firms – does exporting cause a firm to become more productive and improve its sales and profit growth? This question is difficult to answer by simply observing the correlation between exports and firm performance in existing datasets, because exporting may be the consequence (and not the cause) of high firm productivity (e.g., Melitz 2003). It is easy to imagine ways in which export status could be correlated with firm characteristics that directly influence firm productivity growth. For example, dynamic firm managers may be more aggressive in entering export markets and also be more adept learners or more aggressive in making productivity-enhancing investments. The fundamental problem is that non-exporters are different from exporters in a variety of unobservable ways. To establish the causal impact of exporting on firms, one might imagine running a randomised experiment assessing the impact of exporting on firms by randomly assigning shocks to export demand across firms.

Evidence from the Asian crisis

In recent research, coauthors and I exploit a natural experiment – Chinese exporting during the Asian financial crisis – that in key respects approximates the randomised experiment just described (Park, Yang, Shi, and Jiang, forthcoming). In June 1997, the devaluation of the Thai baht led to speculative attacks on many other currencies worldwide. While the Chinese yuan remained pegged to the US dollar, many important destinations for Chinese exports experienced currency depreciations due to the crisis (both nominal and real). For instance, between 1995 and 1998, the Japanese, Thai, and Korean currencies depreciated in real terms against the US dollar by 31%, 32%, and 43%, respectively. At the other extreme, the British pound and the US dollar experienced real appreciations against the yuan, by 14% and 7%. Because the exchange rate changes varied so widely, two observationally equivalent firms faced very different export demand shocks if one happened to export its goods to Korea and the other exported to the UK.

The Chinese case is particularly interesting for studying the effect of exporting on firm outcomes, because in recent years, China’s export growth has been phenomenal, driving it to become one of the world's largest exporters. From 1990 to 2000, Chinese exports nearly quadrupled from US$88 billion to US$330 billion.1 Over this period, China’s export growth rate was the sixth highest in the world. There also is evidence that during the 1990s the technological sophistication of Chinese exports increased substantially (Schott, 2006; Rodrik, 2006). Another advantage of studying China in our research is that the country did not suffer from a currency crisis itself during the Asian financial crisis, but rather experienced relatively stable economic policies and economic performance during the 1995-2000 period.

Our analysis uses longitudinal data in 1995, 1998, and 2000 collected by China’s National Statistical Bureau on firms with some amount of foreign investment.2 For each firm, we construct an exchange rate shock measure specific to that firm, which is the average exchange rate change of a firm’s export partners weighted by the firm’s export destinations in 1995 (prior to the Asian financial crisis). We focus on changes in exports driven by these exchange rate shocks.3

Using this approach, we ask whether and how instrumented changes in exports affect measures of firm performance. We find that increases in exports are associated with improvements in total factor productivity, as well as improvements in other measures of firm performance such as total sales and return on assets. Our estimates indicate that a 10% increase in exports causes productivity improvements of 11% to 13%, nearly one-eighth of the mean productivity improvement from 1995 to 2000 in our sample.

Additional results provide suggestive evidence that the association between increases in exports and productivity improvements reflects “learning by exporting,” for example via inflows of advanced technology or production techniques from overseas export customers. We find that changes in exports are more positively associated with productivity improvements in firms exporting to destinations with higher per capita GDP, which presumably have more advanced technologies.

Footnotes
1 US dollar figures are real, base 1995.
2 We are restricted to analyzing only firms with some foreign investment participation because the data necessary for the analyses are not available for purely domestically-owned firms.
3 The econometrics involves using the firm-specific exchange rate shock (and interactions with pre-shock firm characteristics) as instruments for the firm’s change in exports from before to after the crisis. Because the timing and pattern of devaluations due to the crisis were unforeseen, this instrumental variable approach plausibly satisfies the requirement that the instrument be uncorrelated with the ultimate outcomes of interest except via the channel of interest (the change in exports). An attractive aspect of this approach is that exchange rate shocks are firm-specific, so we can control for province-sector fixed effects and thus rule out bias from unobserved changes affecting specific sectors in each region.

References
Edwards, S. (1998).
Openness, productivity, and growth: What do we really know?, Economic Journal 108: 383-398.
Frankel, J. and D. Romer (1999).
Does trade cause growth?, American Economic Review, 89(3): 379-399.
Irwin, D. and M. Terviö (2002).
Does trade raise income? Evidence from the twentieth century, Journal of International Economics, 58: 1-18.
Melitz, Marc (2003), “
The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity,” Econometrica, Vol. 71, No. 6, November, pp. 1695-1725.
Park, Albert, Dean Yang, Xinzheng Shi, and Yuan Jiang (forthcoming), “
Exporting and Firm Performance: Chinese Exporters and the Asian Financial Crisis,” Review of Economics and Statistics.
Rodriguez, F. and D. Rodrik (2001).
Trade policy and economic growth: A skeptic's guide to cross-national evidence,” in Bernanke, B. and K. Rogoff (eds.), NBER Macroeconomics Annual 2000, MIT Press, Cambridge, MA.
Rodrik, Dani (2006).
What’s so special about China’s exports?, NBER Working Paper 11947.
Sachs, J. and A. Warner (1995).
Economic reform and the process of global integration, Brooking Papers on Economic Activity 1995(1): 1-118.
Schott, Peter (2006).
The relative sophistication of Chinese exports, NBER Working Paper.
World Bank (1993).
The East Asian Miracle: Economic Growth and Public Policy. Washington DC: Oxford University Press.

WSJ : Zambia's Copper Meltdown

Open economies and government size...

A new article argues that more open countries have larger public sectors because greater involvement in foreign trade allows a government to shift more of the cost of providing a public good onto foreign consumers. Globalisation may actually protect or even promote public inefficiency :

How do governments react to globalisation? Paolo Epifani & Gino Gancia, Vox EU, Commentary :

It is widely believed that governments of more open countries are forced to reduce taxes and public expenditure to attract foreign investment and human capital, or at least to prevent domestic firms from relocating abroad. Although this is certainly possible, the data tell a different story. As first shown by David Cameron (1978), and then by Dani Rodrik (1997, 1998), more open countries have bigger governments. In Epifani and Gancia (2009), we provide more evidence on this puzzling stylised fact. Using a panel of 150 countries observed over half a century (1950-2000), we find a strong positive correlation between trade openness and government size, not only across countries but also over time. In particular, a 1% increase in openness (the ratio of imports plus exports to GDP) is associated with a 0.15% increase in government share of GDP. Together with the fact that openness increased, on average, by 42.5% in the second half of the last century, the growth of trade volumes alone can explain a 6.5% increase in the size of the public sector, more than one-half of its total increase (12%).

So far, the main explanation for this observation is due to Rodrik, who argues that, in more open countries, firms and workers are more exposed to external risk and therefore demand more public insurance. Although plausible, this explanation fails to convince. In particular, if trade openness increases the demand for public insurance, this should show up in a surge of public transfers for social security and welfare. Our evidence shows however that, unlike government consumption, this kind of expenditure is uncorrelated with trade openness. Moreover, terms-of-trade volatility, which has been suggested as a measure of external risk, does not seem to (robustly) affect any kind of government expenditure.

Economic openness and the cost of public spending

We propose a different explanation. More open countries have larger public sectors because the cost of providing public goods is lower the higher a country’s involvement in foreign trade. The basic idea is that an expansion of the public sector crowds out private production, thereby reducing the domestic supply of exports. As long as the world demand for domestic products is downward sloping, a fall in domestic exports brings about a terms-of-trade improvement that partly compensate the increase in public expenditures. In other words, the rise in export prices shifts some of the costs of the public sector onto foreign consumers. This effect is stronger in more open economies, because the real-income effect of terms-of-trade movements is proportional to the volume of trade. Moreover, such a terms-of-trade improvement materialises independent of whether a country is large or small, provided that it produces differentiated goods. For instance, given that Nokia’s mobile phones are perceived as different from Motorola’s, even a country as small as Finland is a price setter in world markets. Hence, insofar as the price of a Nokia mobile reflects high domestic taxes, every unit sold to foreigners provides a subsidy to the Finnish welfare state.

In our data, we find that the positive correlation between openness and government size holds strongly only for countries producing differentiated products. Moreover, simple calibrations suggest that the mechanism illustrated above is quantitatively relevant, as it can explain the entire empirical correlation between openness and government size, and between one-third and one-half of the overall average increase in public spending over the second half of the last century.

That the growth in governments’ size is driven by terms-of-trade considerations may appear implausible at first. It is less so once it is understood that terms of trade and relative wage are closely related in open economy, for any policy that increases the relative demand for domestic labour also affects positively the terms of trade. This is indeed the case with public expenditure. A shift in the composition of expenditure from private to public raises the relative demand for domestic labour, because public goods and services are produced almost entirely locally, whereas private goods are partly imported. Evidence on this is compelling. In a sample of developed and developing countries with available data, we find that the average import share in government consumption is 1%, versus an economy-wide import share equal to 50%.

Hence, the logic behind our results is closely related to the Keynesian view that public expenditure can be used to sustain demand for domestic labour. The current crisis offers numerous examples of how globalisation affects this logic. For instance, when asked how to give a stimulus to the US economy, a PIMCO spokesman said: "Consumers will just buy more Chinese goods with stimulus package money, more of the same. What is needed is public investment to fill demand void of private sector". This is the mechanism we stress in action. In a world of integrated product markets, sustaining demand via public spending is considered more effective than a tax cut.

Restraining fiscal policy externalities

What are the normative and policy implications of our findings? From a welfare standpoint, our explanation is fundamentally different from Rodrik’s. While the expansion of the welfare state to provide more public insurance can be optimal in the presence of higher risk, the terms-of-trade externality we emphasise leads to welfare-reducing overspending. This happens because, in the absence of international coordination of fiscal policies, governments do not internalise the costs they impose on the world economy. What are then the remedies to this inefficient by-product of globalisation? One option could be to extend the WTO rules, currently limiting terms-of-trade manipulations arising from non-cooperative trade policy, to correct the externalities arising from fiscal policy as well. However, expanding the scope of the WTO rules in this direction would be a very difficult task, because fiscal policy is widely perceived as a matter of national sovereignty over which no country is readily willing to accept foreign-imposed constraints. This may explain why market integration and political cooperation have proceeded at an uneven pace.

The EU may appear in this respect an exception, as it imposes constraints on fiscal policy to member states and provides an appropriate institutional framework to achieve fiscal policy coordination. Yet, its rules do not provide a full solution to the fiscal externalities due to globalisation, as they impose limits on governments’ budget deficits and debt, and therefore at most only indirectly alleviate the inefficiency arising for an excessive level of public spending.

Finally, a dismal implication of our results is that globalisation may increase the temptation for policy makers to use public resources for their private aims. This is because the welfare cost of wasteful public spending may be lower in open economy, partly offset by terms-of-trade movements. This suggests that, contrary to the firm belief that globalisation is efficiency-enhancing, it may actually protect or even promote public inefficiency.

References

Cameron, David R. (1978). "The Expansion of the Public Economy: A Comparative Analysis," American Political Science Review, 72, 1243-1261.
Epifani, Paolo and Gino Gancia, G. (2009). "
Openness, Government Size and the Terms of Trade," Review of Economics Studies, 76, 629-668.
Rodrik, Dani (1997).
Has Globalisation Gone Too Far?, Institute for International Economics, Washington, DC.
Rodrik, Dani (1998). "
Why Do More Open Economies Have Bigger Governments?" Journal of Political Economy, 106, 997-1032.

To whom will the windfall now?

"Basically what it means is that one tax regime they [Mining Companies] did not like because it was eating into their profitability is scrapped and they should have no complaints....We were aware as the government of (constraints) created by higher taxes at the mines. Zambia will now be perceived as a friendly country in terms of tax regime and it will attract more investments."

Mines Minister Maxwell Mwale explaining why the Government forced through the abolition of the windfall tax despite opposition from many corners, including former Finance Minister Minister.

The Opposition were particularly angry last week on this government initiative, culminating in a walk out from Parliament. The Patriotic Front Chief Whip Hon Yamfwa Mukanga described the Government action as an "act of betrayal":

"The situation is that we don't want to be a part of the removal of the windfall tax. Windfall tax is very important. In order for this country to survive we need income. And we have been fighting in this House that we may have a lot of money donated by a few countries. Through windfall tax we can make that money because God has given us copper. We want to use our copper, we do not want to have a donor dependence syndrome to continue.....So what we thought was if the windfall tax was there we would be able to raise a lot of money. But this government seems to continue to be depending on donor funds, the goodwill of donors. It won't work, one day the donors will pull out. So today we decided not to be a part of these [windfall tax] issues. If they want to ensure that they remove that clause which allows them to collect windfall tax let them do it alone. In fact the windfall tax as it is in the law it is supposed to be triggered when copper prices reach $5, 112 per tonne. The second trigger point is in the range of $6, 600, the third trigger point is in the range of $6,700. So this is still way up the current copper price. That's why we are not happy that the windfall tax can just be abolished like that, NO. We are losing out, we are not helping the Zambians. Zambians will continue to suffer with a government like this. That's why the people out there should be able to see who is with them and who is against them. With this type of understanding we will always have problems, that's why we decided, no let's walk out, we don't want to be part of it."

Saturday, 28 March 2009

Friday, 27 March 2009

Ha-Joon Chang on Bad Samaritans

As a follow up to Bad Samaritans, By Ha - Joon Chang (A Review) . I have decided to move this video forward in time from exactly one year ago when we blogged it, largely for the benefit of new readers who may not have been aware of this.

The Floods

Five questions on diversification..

The recent collapse in commodity prices, especially the price of copper, has amplified the debate on diversification in our nation. From budget statements to independent columnists the word on every Zambian who knows a thing or two about our current economic predicament is diversification. If the explanation for the timing of this racheting-up in the diversification debate is obvious, the nature of this renewed quest remains unclear. In many respects we are still wandering in darkness on the way forward. So I thought to spark more meaningful and focused discussion, I pull together some materials scattered on this blog by way of five main questions : a)what do we mean by diversification; b)why do we need to diversify, if at all; c)what progress have we made in this area ; d) what constraints do we face in our question for further diversification; and, e)what can we now try and do differently ?

Question 1 : What do we mean by diversification ?

There are essentially four fundamental ideas that people have when they speak of diversifying the economy through the press:

  • The first revolves around the call for the country to expand the diversity of existing products that are consumed at home and exported abroad. For example the JCTR recently noted that “Zambia needs to diversify the production and consumption of its food crop away from heavy dependence on maize if it has to attain food security and we call upon the recently constituted taskforce to critically examine this issue…”. Although this is motivated by the quest to expand exports it’s also been used in agriculture as the basis for securing food security. We have heard similar calls regarding the mining industry, in particular the need for Zambia to expand the portfolio of mining products it exports abroad e.g. expanding the production of manganese in Luapula and enhancing the emeral industry.

  • The second involves the expansion in the range of markets into which existing products or services are sold. This has been less common but some have noted that there significant opportunities for existing products to be marketed abroad, this is especially the case with those products where Zambia may be able to develop a niche e.g. specialised agriculture produce, cultural products, etc.

  • The third idea involves taking advantage of opportunities to expand exports of services. This is essentially the call from moving into trade in services of which the most prominent in Zambia are: tourism; telecommunications; financial services (banking, insurance and accounting); and, transportation. The call for greater expansion in tourism has been particularly loud culminating in the Budget 2009 spending commitments as well as certain incentives. Others have also noted the possibility for Zambia to expand its air transport sector and take advantage of its geographical position.

  • Finally, the idea of moving from copper dependence to low value manufacturing products. This is the “traditional route” of diversification and is what many observers have been calling for a while. The Citizens Economic Empowerment Commission (CEEC) Commissioner last year noted: "Our country exports a number of raw materials that are processed in the developed countries and re-exported back to Zambia as finished goods at exorbitant prices. When we increase the skill levels of labour, we will be increasing value added activities and providing employment opportunities to our own people....."
The above distinction is quite important because some of the processes may be more natural than others. In other words, some form of diversification would occur naturally as the economy grows (i.e. diversification to essentially mean growth). Other forms of diversification would simply not occur even in the presence of growth (e.g. the economy might grow inspite of zero diversification within agriculture). Understanding nature of the diversification processes and their relative importance therefore becomes crucial.

Question 2 : Why bother with diversification?

There are many reasons why countries diversify generally. Achieving strong economic growth is fundamental to reducing poverty. In order to do that Zambia needs to leverage the demand and resources that are available not just within Zambia but also abroad. That means it needs to fully exploit its resources and engage in trade with the outside world. That calls for increased competitiveness in every sector in order to attract foreign direct investment and boost national productivity. Naturally debate exists here on how this can best be achieved. Its not the focus of this piece to discuss this element but simply to point out trade is crucial (for some of the on-going debate on this see Bad Samaritans, By Ha - Joon Chang (A Review)).

Economic diversification is widely seen as a positive trade objective in sustaining economic growth. Diversification makes countries less vulnerable to adverse terms of trade shocks by stabilizing export revenues, makes it easier to channel positive terms of trade shocks into growth, knowledge spillovers and increasing returns to scale, creates learning opportunities that lead to new forms of comparative advantage.

For many countries the issue is not that exports are concentrated but that they are usually concentrated on homogeneous products with individual exporting countries facing a highly inelastic demand curve such that changes in global supply translates into significant price volatility with many poor income countries such as Zambia often suffering terms of trade shocks that adversely affect investment and even consumption e.g. the recent shock to commodity prices. Violatility in income terms of trade can depress long-term growth. Indeed, though the evidence is not universal, several cross country studies have shown that greater diversification is correlated with more rapid growth of per capita income.

The issue therefore is not so much whether diversification is beneficial but rather what diversification process is worth pursuing and could be realistically achievable with deliberate policies. This is particularly important for Zambia because its quest to diversify has been somewhat mixed, with the extent of “diversification” depending largely on the metric used for measurement.

Question 3 : How much progress has Zambia made in terms of diversification?

The answer here largely depends on the definition adopted. If we focus purely on the structural composition of GDP, it is obvious that the sources of Zambia's growth are broad based, as revealed by the chart below from the latest 2008 Economic Report :

Figure 1: Sectoral Contribution to GDP (2008)
Simply put, the mining contribution to the growth in GDP is not as pronounced as many people think. As a side track, its partly why I am confident that Zambia will achieve its growth objective of 5% real GDP growth this year, despite the fall in commodity prices. For a nation supposedly dependent on copper the figures above provide food for thought. As we ponder diversification, we should ask ourselves whether we are doing enough with the copper we have.

The focus invariably has been on "export diversification" for reasons advanced above.

In terms of the diversity of products exported abroad, there are certainly signs that Zambia is broadening its export base. The diagrams below extracted from a previous blog, helps to paint the picture.
Figure 2 : Degree of Export Diversification

Figure 3: Composition of Exports

While in 1980 the largest exports accounted for 96% of exports, in 2004 they made up 80% of exports. Mining products continue to dominate exports, but while in the last 30 years the economy relied exclusively on export of ores and metals, in the last 17 years agriculture exports have become more prominent. Indeed this process of diversification appears to have spread within mining itself with some signs that Zambia has begun diversifying away from copper into other base metals and precious stones. However, in both instances the pace of diversification has been too slow.

More worryingly Zambia has not made significant progress is in the area of manufacturing which still accounts for less than 10% of exports. In addition, although tourism continues to grow off the back of limited competition from Zimbabwe, it remains far behind in terms of the level of tourists compared to regional competitors such as South Africa and Kenya. Similar picture emerges for telecommunication industry where the underperformance of ZAMTEL has restricted the growth of the industry and its ability to become a regional exporter in telecommunication services.

Figure 4 : Share of Exports across African countries

Indeed, Zambia’s performance relative to other countries remains poor in terms of export diversification (see Figure 4). Zambia has one of the highest shares of mineral exports on the African continent, making it extremely vulnerable to base metals shocks as we are current experiencing. More importantly, closer examination of data reveals that nearly all the countries with higher share of mineral and oil exports, Zambia is alone in depending on copper. Many of the high mineral dependent nations rely on oil where the windfall gains are substantially higher, lessening the need for diversification.

Question 4 : What constraints are preventing Zambia from further diversification?

Undoubtedly the historic legacy of colonialism which focused on mineral extraction and UNIP’s failed experiment in socialism are at the heart of the copper dependency. However, equally hopeless was the poor implementation of the privatisation process which led to the collapse of many non-mining sectors. The privatisation process also had another impact, the process led to significant reduction in copper output and associated revenue, eventually forcing the government to transfer these valuable resources into foreign hands.

I have previously noted that most emerging countries pursuing diversification use "resource wealth" to fund infrastructure and other industries. Chile being the most prominent. It continues to use the mineral wealth prudently, not only in terms of keeping the exchange rate in check through a stabilisation fund, but have also used windfall revenues to enhance productivity in other sectors. Indonesia in the 1970s and 80s also stands out as another example. It used its oil revenues to pursue an agriculture-led growth strategy with investment in rural infrastructure, such as irrigation and roads, as well as in input subsidies for fertilisers and pesticides. Unfortunately, Zambiah as been unable to fully utilise these national resources to its advantage and now appears to have missed the windfall gains that would have helped it secure diversification.

Beyond these general points there are specific issues related to the relevant industries. Although the tourism sector has grown significantly, its progress is being impeded by poor transport and hotelling infrastructure especially in Luapula and Northern Provinces where tourism opportunities abound. Similarly with agriculture the country suffers not only from poor physical infrastructure provision, which impedes access to markets, also from artificial constraints such as import and export restrictions as well as poor access to credit and lack of education and research - see A better vision for agriculture for more discussion.

Question 5 : How does Zambia move forward?

In order for Zambia to make rapid progress in diversification and without access to mineral wealth, it is vital that we learn how to overcome these constraints. My view is that rather than seek diversification as the goal we should recognise that growth is the goal and that diversification is the means to get there. We therefore need a holistic framework that involves a sector by sector assessment of the constraints and then finding appropriate solutions for eliminate those constraints.

A crucial aspect of diversification is “market discovery”. There are a number of areas in key sectors were the main constraints facing entrepreneurs appear to be knowledge about market opportunities. There are many good opportunities for income creation in rural and urban areas, but locals are just not aware of the opportunities or they struggle with discovering the profitable markets, this is especially the case in agriculture markets. Although private organisations are doing their bit to unlock the potential that exists, the government can play a more proactive role at the local level working with communities to identify their local assets and solving the coordination and "market discovery" failures that exist. Unlocking these opportunities would make our local areas engines of agriculture growth.

It is also critical that with reduction in mining investment, more is done to take advantage of FDI flows in other sectors especially that which is spearheaded through the MFEZs. In order to take advantage of the increase in foreign direct investment, it is critical that government puts policies in place that encourage spillovers from new FDI to domestic firms. These spillovers are critical for long-term diversification, but are not inevitable. The right conditions need to exist for them to occur. Existing empirical consensus shows that it is difficult for emerging economies, like Zambia, to extract potential benefits of spillovers when a large technological gap exists between domestic and FDI firms. It’s therefore imperative that government places FDI policy within a broader economic policy context, by taking forward necessary steps to invest in basic infrastructure, education and training, and above all encourage Zambian firmsto invest in technological development. These policies will do a great deal in increasing Zambian firms technological capability, and hence make it easier for the nation to benefit from spillovers and enhance diversification.

Thursday, 26 March 2009

A wake up call (Guest Blog - KBM)

The heated exchange between MPs on one side, and the technocrats – represented by Dr Godwin Beene, on the other over the amendment of Mines and Minerals bill is a wake up call. It is a wake up call in the sense that either - the world wide economic meltdown is driving Zambians to the mountains or else we've been hit by a leadership crisis.

Otherwise how on earth would anyone think of replacing a "good bill" with a "bad one"? The empowerment clauses inserted into the Zambian Act or Acts, have been put there for a purpose. For example, a clause reserving mining rights for industrial minerals to a citizen of Zambia and a citizen-owned company is for the sake of protecting Zambians. Otherwise with Zambians owning a limited amount of resources and capital – there would be no level playing field.

Given an opportunity, foreigners would not hesitate to scramble for resources and crowd out Zambians. And when that happens – once more, Zambians would go back to the days when they were hewers of wood and carriers of water. I am sure socialist --- Michael Manley of Jamaica would be turning in his grave.

When attacked by agile MPs, Dr Beene defended the bill by asserting that – the amendment would not touch "the small scale mining rights". It is as if that's all Zambians are entitled to. Hell no!

Zambians want their full rights and access to the assets and resources at its disposal. Beene went on to argue that – unless the amendments were effected, foreign investments would be hindered. Moreover, where is the evidence that these changes would indeed result in attracting FDIs? No position paper or academic write-up is available to support the contention.

Perhaps this is the time when Zambians can put the experts and learned members of EAZ (Economic Association of Zambia) to good use. After all, EAZ has signed up to act literally as an adviser to Parliament. Days are gone when decisions were based on guess work or the intuition of a leader or politicians. Background information is now needed for making sound decisions – otherwise we cannot compete with those countries using sophisticated information networks.

Zambians thought that late President Levy Mwanawasa (may his soul rest in peace) – showed us the best way out. When threatened by Anglo-American company to pull out of the mines at short notice, he didn't blink. In fact he cursed them to go to hell. And at that point he went ahead to craft a sales package making sure that our rights to resources remained intact. He offered concessions which attracted investments.

Although Levy's package was not perfect, but it got us all the investors we wanted generating a 5-6 percent-point annual growth rate in the process. Not bad! Why can't Rupiah Banda (RB) do the same thing?

There is no where it is written, that Zambia's economic development can only be done by foreigners. In fact it has been demonstrated before – under KK, that Zambians are capable of building Fortune 500 companies. Many ZIMCO group Zambian-run companies met the grade. What's the problem now? Are Zambians less capable now?

This trend of giving up and entrusting economic development into the hands of foreigners – be it donors, is very dangerous. The other day some farmers and some civil society organizations such as CSBF (civil society bio-fuel forum) were fuming about a large chunk of land being given to foreign investors for the development of Jatropha. Earmarking a large piece of land for the sake of foreign-type of development would be an insult to Zambians.

And while we are at it – where are the opposition parties to block these backward initiatives? If they're potential governments in waiting – why can't they come up with alternative strategies and vision to that of MMD? MMD has run out of ideas. Finito!

Unless we do something about this, the survival of our sovereignty is a t risk.

Kaela B Mulenga / Guest Blogger
Columnist & Development Consultant
zbia@hotmail.com

Linking Zambia (Zambia Development Agency)

A new look website from Zambia Development Agency. This replaces the old Zambia Privatisation Agency.

Tuesday, 24 March 2009

Mineral Rights

An interesting row has broken on the new proposed Mines and Minerals Development (amendment) Bill of 2009, with some parliamentarians arguing that it is in conflict with the Citizens Economic Empowerment (CEE) Act of 2008, which aims at empowering Zambians. The amendment will entail deleting sub-section four of section seven of the Mines and Minerals Development Act which states that a mining right for industrial minerals shall only be granted to a citizen of Zambia and a citizen-owned company. The government believes this impedes investment.

I'll see if we can get hold this draft bill. Parliament Online have been unsually slow on making draft bills available. They have not uploaded a single draft bill this year.

ZDA Spotlight

A new e-newsletter from the increasingly influential Zambia Development Agency.

ZDA Spotlight : Issue 1

Monday, 23 March 2009

Linking Zambia (Zambia National Farmers Union)

A new website for the Zambia National Farmers Union. This is a great development and long overdue!

Bad Samaritans, By Ha - Joon Chang (A Review)

Bad Samaritans, Ha- Joon Chang
A Zambian Economist Review

I first came across the “infant industry argument” during my A-level economics class at Bearwood College. It was forever imprinted on my memory as an absurd excuse by inefficient states for protectionism. We were taught that the process to good economic development was through free trade and more importantly history and theory supported it. Of course since then I have come across fantastic papers that debunk the one sided nature of the free trade indoctrination, with Robert Driskill’s ‘Deconstructing the argument for free trade’ probably being among the best of them. However, it remains the case that this simplistic and biased view of free trade continues to dominate current development economic thinking and media punditry. Such is the scale of the challenge that the brilliant South Korean economist Ha-Joon Chang seeks to overcome in this entertaining and highly readable book. In my view the book successfully demolishes the free trade and economic development myths that are perpetuated by “neo-liberal economists” and the “bad Samaritan” institutions of the IMF, World Bank and WTO and their supporting governments.

Anyone preaching a different doctrine of development from the "neo-liberal" brigade is naturally declared a heretic and consigned to the periphery of mainstream economic thought. Not Ha-Joon Chang. A renowned development economist, who has worked as a consultant for the World Bank, Asian Development Bank, various UN agencies and many governments around the world. A recipient of the prestigious Leontief Prize and good friend of Nobel Laureate Joseph Stiglitz, Professor Chang has published many articles on the subject, including the critically acclaimed 'Kicking Away the Ladder - Development Strategy in Historical Perspective'. If anyone knows how the South East Asian miracle was born and any lessons it holds for poor nation, it is Chang.

Bad Samaritans aims to reverse the conventional wisdom and logic about development, especially the “official narrative” about how rich countries became prosperous and the implications it has for the advice being provided by the IMF / World Bank to developing nations like Zambia. By taking an in-depth look at the history and policies of developed nations, Bad Samaritans successfully demolishes the current free trade model of economic development and in its place erects a pragmatic and reasonable alternative. There are many important points raised in the book, but four critical conclusions are worth highlighting in this short space.

First, history rejects “free trade” and supports the “infant industry” argument as a model for development. According to Bad Samaritans, the “official version” of free trade globalisation is that Britain and the USA have been long adherents of free trade and this was responsible for their march towards growth and prosperity. Chang demonstrates that not only did these economies and other European nations emerge from protectionism, which they have denied developing countries, but they often imposed free trade on weaker countries to perpetuate their inbuilt advantages. To make matters worse (or better depending on your stand point), virtually all successful economies, developed and developing, got where they are through selective and strategic integration with the world economy rather than through unconditional global integration. Crucially, according to Chang, the performance of the developing countries was much better when they had a large amount of policy autonomy during the 'bad old days' of state-led industrialisation than when they were totally deprived of it during the first globalisation (in the era of colonial rule and unequal treaties) or when they had much less policy autonomy (as in the past quarter of a century).

Second, economic theory, properly understood demonstrates the limited nature of free trade theory and lends credence to the infant industry argument. The modern argument for free trade is based on the Heckscher –Ohlin-Samuelson (HOS) argument where comparative advantage is derived from differences in endowment of key factors of production, with each country specialising on those things where it has a relative advantage. Under the HOS theory free trade is beneficial, even in the face of protectionism (i.e. unilateral free trade) because the country concentrates on what it’s good at and imports the rest. The basic flaws of this theory are well understood and include issues related to immobility of economic factors of production and weak compensation mechanisms of losers from trade. Where Chang deals it a fatal blow is the cogent argument that the theory is about efficiency in the short run use of given resources and not about increasing available resources through economic development in the long run (which is what we really want). In the words of Chang, "contrary to what [free trade] proponents would have us believe, free trade theory does not tell us that free trade is good for economic development". Underline the phrase “economic development”.

Thirdly, the path to development lies in sacrificing today’s pleasure for long term benefit. The current free trade globalisation, according to Bad Samaritans, is built on a false premise that effective economic development embodies certain key requirements: privatisation of state utilities; unrestricted FDI; very low inflation; balancing the budget (no deficits!); deregulated capital markets; fully convertible currencies; thriving democracy; and, zero tolerance on corruption. Bad Samaritans provides evidence that contradicts each of these requirements. In particular, Chang shows that had countries such as South Korea and Japan followed these policies early on in their economic development, their industries would have been wiped out by external competition. Japan and South Korean would have remained as developing states rather than the economic powerhouses that we see today. By extension, if developing countries are to advance economically they need to rely on a different model to that proposed by the neo-liberal framework. It is important for developing countries to “defy the market” and deliberately promote economic activities that will raise their productivity in the long run — mainly, though not exclusively, manufacturing industries. Chang argues that this process involves capability-building, which, in turn, requires sacrificing certain short-term gains for the sake of raising long-term productivity (and thus standards of living) — possibly for decades.

Finally, if developed nations really want to help developing countries they should accept asymmetric protection. According to Chang, the proper role of developed countries and institutions like the World Bank, IMF, and the WTO, is to get out of the way of developing countries and more importantly accept asymmetric protection for developing states. Neo-liberal, free trade policies serve only to impede and kill off long-term development efforts. Rather than allow developing economies to nurture and grow their home-grown “infant industries,” free trade policies encourage developing countries to focus their economies on less-productive activities such as agriculture which bring gains only in the short run. True economic development, according to Chang, follows from emulating and mastering advanced foreign technologies, applying them to manufacturing, and protecting national industries from foreign competition for a long time. It is decades before such efforts will bear measurable fruit but Chang argues there is no other viable path to an industrialized economy. The challenge for bad Samaritan nations is to give developing countries headroom for them to grow.

These are very fundamental and radical conclusions from a book that is buried in evidence and yet profoundly easy to read. However, there are one or two places where the lack of detail leaves Chang with the need to return to them in the future. One particular area that was glaringly noticeable is the discussion of state led capitalism. While Bad Samaritans ably demonstrates the many flaws with various IMF / World Bank engineered privatisation programs and offers examples of where state owned companies have been successful (e.g. Singapore Airlines) it largely repeats what has already been documented elsewhere. The book would have been more useful discussing what sort of ownership or organisational structures that can be pursued to make for successful state led enterprises. For example, why is Singapore Airlines very successful and other state airlines have failed? Then there’s the all issue of "strategic industries". How does one go about distinguishing areas where the state should or should not consider direct production? I was also slightly disappointed that Chang failed to mention the complicated problem of government taking part in markets where other players already exists and the problems that has for regulation. These are probably issues beyond the scope of the book, but nevertheless pertinent to visioning how Chang's advice can be applied at the country level.

Reading Bad Samaritans and the conclusions inevitably fills one with hope and despair. The despair stems from that it seems like perhaps we are condemned to a different economic fate by the powerful nations that make the rules of international engagement. After all, changing how the bad Samaritans interact with Africa is a slow, if not an impossible task. Chang shows not only that these richer nations have double standards in dealing with ailing nations, but they are systematically erecting an international system of trade that is not to our advantage e.g. preventing African governments from accessing new technology through perverse patent systems. One can’t help but wonder whether the obstacles, however inadvertent, are just too many against African countries.

But there’s also hope, which in my view rests at three levels: at the global, country and personal levels.

At the global level, the credit crunch should rightly be viewed as an opportunity. The current global turbulence has lifted the lid off the fallacy of neo-liberalism unreserved trust in free and unregulated markets. Crucially, the reaction of western governments in face of rising unemployment, financial meltdown and social discontent has been characterised with significant state interventionism (e.g. nationalisation of banks), rising deficits and increased tendencies towards protectionism. Ironically, it is the state driven markets of China and India that now hold the key to global prosperity as their insatiable demand for commodities seek to stabilise the global ship. The age of the IMF and World Bank bully boys may not be over but the model they have espoused appears to be on the verge of collapse. After all, if the USA and France are abandoning neo-liberalism at this critical time, where is the argument for other nations not to do the same?

For Zambia, there are hopeful lessons too, which our current leaders would do well to reflect on :

  • There is an alternative to continuous subservience to IMF and World Bank who were the supreme architect of our failed privatization policy of the early 1990s and have been the key proponents of the current ideology that has led to our vulnerability in face of the current commodity price slump. Had Zambia developed a different model we would have earned significant windfall from the mines and we would have been able to diversify our economy. The IMF / World Bank policies for selling everything because we are incompetent were wrong. We must learn not to repeat these past mistakes.
  • Developing nations can depend on their home grown experts and solutions. Bad Samaritans demonstrates that nations such as South Korea and China have relied on their own experts to devise solutions. These experts may not be economists educated in the finest institutions in the west, but their understanding of local constraints and care for the implication of their advice more than compensates for what bad Samaritan sponsored advisers might offer. We need to trust our own Zambian experts and offer them the chance to come up with indigenous solutions.
  • FDI needs careful thought and should take into account that FDI can be both useful and harmful to long term prosperity. We should not be afraid to ask and answer the important questions: Is it in Zambia's interest that 70% plus of our banking system is foreign owned ? We need to consider whether it is for our long term benefit that all of our mines are in foreign hands. If we have learnt anything from our history it is that ultimate stability can only be guaranteed if Zambians themselves retain some residual control over the future of their economy. Yes, we need foreign direct investment, but we should not do that at the expense of securing a better future for Zambian children in the long term.
Finally, on a more personal level, the Bad Samaritans thesis accords with my established triangulation for development. A question that always goes through my mind as I review these books is the extent to which they impact on my own view of development as an economist. Regular readers will know that I hold dear the belief that strong societies are those supported by a tripod of strong markets, strong democratic foundation and religious or cultural institutions. In many respects Bad Samaritans confirms and strengthens the tripod. Whilst Chang is sceptical of the David Landes view that culture explains differences in development, we are all in agreement of the strong and dynamic role it plays in creating durable societies. Equally on democracy, although Chang rightly scorns the 'modernization hypothesis' that tries to establish causality between income and democracy, unity is found with Amartya Sen’s conclusion that democracy has 'intrinsic value' and important in it's own right. Where I find Chang particularly enlightening is in the concept of how we ensure strong markets emerge in developing countries that form the basis of durable societies. To Chang strong markets are not found in neo-liberal free trade but in a pragmatic long view of what delivers development. Sometimes domestic markets have to be protected, as one would a young child, until they grow and are able to compete and stand strong. The mistake of the neo-liberal ideology is to make strong markets synonymous with unregulated markets. Chang is clear that the goal is not state or free markets, but finding the right balance that delivered strong and durable markets that underpin long term productivity.

To be sure like any book Bad Samaritans has its own imperfections, one of which I have pointed out. However, in my view Bad Samaritans significantly advances the debate on how best developing countries can grow and contribute towards global prosperity. If I had money, I would get every Zambian parliamentarian a copy, with extra copies given out free to every visitor at State House. It is a must read.

Sunday, 22 March 2009

Sharing the proceeds of mining, 2nd Edition

It seems like a long time since I put forward A Human Approach to the "Mining Debate" where I set out a three stage framework for ensuring that local mining activity translated into better pay and working conditions for workers and improved local economies. Back then we were fighting for right to get more revenue for our natural resources and in turn transfer that to the locally affected people and their many workers who had poor wages. It also a long time since we were promised the the Environment Protection Fund to deal with local safety and other ills. It is also seems like a long time ago since Nkana Member of Parliament Mwenya Musenge joined our calls for Sharing the proceeds of mining... , where he called for government to immediately establish a mining communities development fund to benefit residents of mining areas. That call like many others before it went unanswered.

Well, the Catholic Church has not forgotten. Last week they returned to our theme by establishing the Zambia Extractive Industries Project (ZEIP) on the Copperbelt and North-Western provinces to ensure equitable benefits from natural resources. Among their aim is to ensure the new Republican Constitution brings on board the social protection for the Zambians from the investors. They have also resolved that there is need for citizens to participate in the formulation of the development agreements so that they know the contents. If thats not enough, they are demanding that the windfall tax in the mining sector be brought back and that the local authority should collect levy from mining companies for each truckload leaving the district. That last demand sounds like a less sophisticated version of what I have argued here.

Who runs Zambia?

This exchange in Parliament between two former occupants of the Finance Ministry and the Vice President on the windfall tax is quite revealing. I am particularly worried that rather than putting forward a reasonable defence for removing the windfall tax (if one exists), the Vice President appears to suggest that the dispute with the mining companies is at the heart of the decision, making the Executive Branch appear to be a puppet of foreign companies.

MPs engage in heated debate over windfall tax, The Post, News Report :

Member of parliament last Friday engaged in a heated debate as they considered the Income Tax (Ammendment) Bill which seeks to suspend the windfall tax on the mines among other things. Several parliamentarians from the opposition and a few from the government argued that the tax should be maintained.

Chilanga MMD member of parliament Ng'andu Magande advised the government not to abandon the windfall tax that was introduced last year on the mining sector. Magande, who is also immediate former finance minister, said removing the windfall tax would put the government at a loss in the event that the price of copper went up on the international market.

"I remember that some time last week, His Honour the Vice-President advised former and serving government officials to maintain their oath of secrecy which they swore when they assumed office. Indeed I do agree with the learned Vice-President who is also the Minister of Justice that there are critical issues which should be granted such secrecy," Magande said.

"Right now I am in a difficult situation wondering that with all the knowledge I have acquired in my service for the Zambian public can I keep quiet because of the oath of secrecy as emphasised by the Vice-President? I want to assure the learned counsel and Minister of Justice that we will keep secrets valuable, but let us also remember that we have to give value to our people.

"On windfall tax I will keep no secrets. May I urge my colleagues in government to consult the team of experts we had assembled to look into the affairs of the mines. We constituted a team of 15 experts including Mr [Evans] Chibiliti, and they are all still in government. You can consult them, they will show you how we came up with the windfall tax."

Magande advised the government to maintain the windfall tax in the law, saying it could easily be adjusted. "We don't need to remove this windfall tax from our statute books, it's self adjusting. We have a law in our statute books, which says that anyone who commits suicide commits a crime. But my question has always been that if I commit suicide that means I am already dead, so how does a dead person commit a crime? You see, this is the law we have maintained. So what nuisance is there in us keeping the windfall tax in our statute books?" Magande asked.

"Yes, I'm aware that sometimes we ignore advice even when it's good. And sometimes those of us who advise are being told that we are wrong by those we advise. This makes one wonder who is really wrong. But since the Vice-President has promised this House that they will consult, I urge them to seriously consider keeping the windfall tax."

And Katuba MMD member of parliament Jonas Shakafuswa accused the current administration of abandoning the Levy Mwanawasa legacy. "This government is discontinuing with the legacy of Mwanawasa. When we campaigned we campaigned on the basis of continuity. But what we are seeing now is a shift from what our late president had believed in. I know that [the] Vice-President is nodding his head. Yes, winning you might win, but it doesn't mean that you have it all," Shakafuswa said.

"Even if we are coerced into voting I don't want to go against my conscience, I would rather side with the people on this issue. We should remember that the windfall tax was meant to give relief to people who service government through Pay As You Earn. Maybe people who were new didn't understand it.

"We have to be careful with our kindness to these foreign investors. Let's remember that we sold the mines for almost nothing and within a year the people who bought the mines got back their money and made huge profits. Those investors should not take government for granted.

They should know that in business there are ups and downs. When the price of copper was good, they made a lot of profits and they stashed this money in their banks outside the country. These people can go ahead and develop India, China, UK and we remain begging. Our children won't see the benefits of these minerals, they will only see holes from where the minerals were dug. Maybe somebody was bought, maybe somebody was given something."

But Vice-President George Kunda vowed that the Bill would not be withdrawn from Parliament.

"We are not saying that mining companies will not pay tax. But we have considered certain circumstances. Mining companies declared a dispute with us over the windfall tax. Some of them have paid this tax, others have not. So we have decided to go for arbitration with regard to tax. We must make investment attractive to investors, especially those who are keeping jobs," Vice-President Kunda said.

"This Bill if withdrawn will throw the budget off balance. If the issue of windfall tax is something, which is of concern it would require ourselves to go back and consult. We are determined at this stage to proceed with this Bill. It has several meaningful provisions. For example, the CDF [Constituency Development Fund] is coming from the tax measures instituted. I know you are determined to fight but there is a lot we can benefit from this Bill. There is CDF where a lot of us MPs can benefit by building clinics, hospitals and schools."

The debate later led into a division where members of parliament voted on whether to pass the Bill to committee stage or not. The Executive won by 63 votes to 54, and the Bill was passed into committee stage where it would be considered on Wednesday next week.

Friday, 20 March 2009

2008 Zambia Economic Report

The Annual Economic Report reviews the country’s economic performance and near-term prospects. The report embedded below has not yet hit the MoFNP website, but you can access previous reports there.

2008 Economic Report - Zambia