Export diversification is the holy grail of Zambia’s economic policy making. Which is why the chart below provides some encouragement we need to build on. Non traditional exports (NTEs) have been rising driven by the surge in exports of gemstones, burley tobacco and cotton. The challenge is how to sustain this pace.
On going GRZ investment in transport infrastructure should help reduce the cost of doing business further, provided the projects are properly delivered and maintained. But we also need greater focus on industry specific issues. For example, tourism is currently stagnant. Its progress is being impeded by lack of policy direction from the top, poor marketing and hotel infrastructure especially in Luapula and Northern Provinces.
Similarly, agricultural diversification continues to suffer from inefficient policy distortions, and poor access to credit, education and research. Even the gemstones sector which is currently doing well is in danger of being reversed due to unnecessary restrictions around foreign auctions.
It is vital that we overcome these constraints. The key lies in seeing growth as the goal and export diversification as the means to get there. Hence there’s need for a holistic framework that involves a sector by sector assessment of the constraints and then finding appropriate solutions for eliminating those constraints.
This should be at both the national and local levels. The approach should be complemented with greater effort to get domestic firms to take advantage of FDI flows especially in sectors spearheaded through economic zones (MFEZs). The policy of industrial clusters was meant to help us push this forward but it appears to have lost momentum. In any case it needs a greater overarching vision of growth that is just not there currently.
Government also needs to put in place policies that encourage spillovers from new FDI to domestic firms. These spillovers are critical for long-term export diversification, but are not inevitable. 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. In particular, it needs to increase momentum in ramping up basic infrastructure, education and training, and above all encourage Zambian firms to 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.
The other tricky issue is having an exchange rate that is competitive and predictable. Which takes us back to the ineptitude at BoZ and Ministry of Finance where a pursuit of a stronger Kwacha at all costs has led to depletion of foreign reserves. BoZ has not been good at managing the currency towards a new competitive equilibrium that is broadly predictable to exporters.
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Chola Mukanga | Economist
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