Find us on Google+

Tuesday, 28 January 2014

The Proposed Creation of INDECO

Editor's note: This is a guest post by Henry Kyambalesa (PhD), a resident contributor to Zambian Economist. He is a Zambian academic currently residing in Colorado, USA. This article is a response to comments received by the author on his previous piece published here. 
From the late 1960s to 1991, the Zambian economy was managed by means of socialist state policies, which barred both local and foreign private inves tors from certain commer cial and indus trial sec tors of the econo my. Dr. Kenneth D. Kaunda made the policy pronounce ments which ushered in an era of both parastatal and state enter prises in his April 1968, August 1969, and November 1970 addresses to the Nation al Council of the United National Independence Party.

Naturally, the monopolistic position enjoyed by state and parastatal companies culminated in com placence and gross ineffi cien cy because, in the absence of competi tion, they appar ently did not find it necessary to seek or use innovations and technological inven tions that would have improved the quality and quantity of their outputs.

This, in part, prompt ed the next govern ment of the late President Frederick J. T. Chiluba to embark on economic reforms upon his inaugu ration in November 1991. The reforms were designed to ensure that investment laws were clear, transparent, and accessible. These reforms included the following:
  • Abolition of price controls;
  • Abolition of exchange rate controls;
  • Privatization of state-owned companies;
  • Liberalization of interest rates;
  • Provision for 100% repatriation of profits;
  • Removal of quantitative restrictions on imports; and
  • Removal of restrictions on investment in all sectors of the country's economy.
The reforms were designed to create a market-based economy—a private-sector-driven economy.
What, then, are the negative effects associated with the proposed resurrection of the defunct Industrial Development Corporation (INDECO or IDC)?

First, it will reverse the benefits of the privatization of state-owned enterprises, which, according David Chilipamushi, has stimulated private investment, has given econom ic power to a greater number of people through stock owner ship, has promoted com petition and consequently encouraged efficiency in com merce and industry, has beefed up government coffers through the sale of govern ment hold ings in state companies, and has eased the financial burden of state companies on the public treasury.

Second, it is likely to culminate in increased public-sector borrow ing and government spend ing to finance its operations, and the operations of its subsidiaries, especially in times when it will not be able to generate profits.

Third, it will inevitably compel the government to re-introduce a regime of price controls. In this regard, allow me to state Murray Sanderson's view concerning one of the adverse effects of price controls. In his view,
"Price con trols have the effect of discourag ing supply while en couraging demand. The inevita ble result is scarcity of commodi ties; and when there is scarcity, you always get people who buy up commodities wherever they can and resell them on the black mar ket. In Zambia, we call them 'black marke teers.' It is a useful term, for it puts the blame upon them rather than the authori ties."
Fourth, it is likely to culminate in rampant shortages of commodities, smuggling, and stunted economic growth like the INDECO of the UNIP era—effects which are commonly associated with socialist policies. The infamous long queues for essential commodities like sugar and cooking oil during the UNIP era, which would start building up as early as 03:00 hours even without the assurance that everyone in the queue would eventually buy the commodities they needed, are still fresh in the minds of those who endured the economic hardships of such an era.

Fifth, it is likely to be an enormous consumer of our beloved country's meager foreign exchange reserves, like the defunct INDECO, and also lead to the rationing of foreign exchange and the re-introduction of exchange rate controls.

Sixth, it will certainly put our country at odds with the International Monetary Fund (IMF), the World Bank, and our development partners—institutions and countries which have worked so hard in bolstering our efforts at meeting the development needs of our country and the needs and expectations of the majority of our people since 1991.

That will leave only profit-seeking commercial creditors to lend us money at exorbitant interest rates!

Seventh, it is certainly going to stifle competi tion and innova tion in com merce and industry in the national economy. By and large, "competi tion," according to the Union Bank of Switzer land (quoted by J. A. Reinecke and others), provides "the incentive to do better," because it prompts suppliers to become more innovative in order to satisfy the changing and divergent needs and expectations of consum ers in an efficient manner.

Besides, heightened competition in a coun try's economy can lead to lower prices, high-quality products, and greater variety and abun dance of products in the economy. Moreover, competition generally cures the problem of black markets since it entices suppliers to increase their outputs in order to benefit from economies of scale, thereby saturating a country's markets with a wide range of products.

And eighth, the omnibus monopoly is likely to play a significant role in driving our country from a potentially wealthy nation to a nation saddled with unprecedented socio-economic malaise like its predecessor.

The disadvantages pertaining to the INDECO proposal which I have summarized above are real, and they outweigh any theoretical, ideological, and/or philosophical arguments for (or advantages of) such a proposal.

In all, history should offer us guidance on this matter. Socialist policies are simply a pain in the neck! There is, therefore, no justification for re-introducing an ideology that economically traumatized our people from the late 1960s to 1991.

What our beloved country needs now is the creation of what may be referred to as a "social welfare state"—that is, a dynamic free-market economy that has a human face; or, more precisely, a socio-economic setting that simultaneously provides for a highly competitive business system and an effective mechanism for re-distributing wealth to the needy.

Countries which have succeeded in meeting the basic needs and aspirations of the majority of their people—such as Australia, the United States of America, Luxembourg, Norway, Switzerland, Canada, Japan, the Netherlands (Holland), and Germany—are essentially social welfare states!

In our quest to improve the livelihoods of the majority of our people, therefore, it is perhaps important to keep in mind the following caveats regar ding the pursuit of socio-econo mic development:
"The reality is that the economy does not grow from political slogans ... [b]asic require ments for eco nomic growth are peace and stability, free enter prise, imagi native entrepre neur ship, efficient and frugal govern ment, innovative and caring manage ment, a well-educated and motivated work force, and a lot of hard work."—F. W. de Klerk, former President of South Africa.
There is an urgent need for national leaders to re-define the roles of their governments away from direct involvement in commercial and industrial activities toward the pro vision of inducements, guarantees and essential public services and facilities to their primary stakeholders.—Adapted from AlassaneOuattara, current President of Côte d'Ivoire.
There is absolutely no reason why Zambia cannot create a socio-economic regime that can be emulated by other developing nations worldwide, given the fact that it is blessed with abundant natural endowments, including fertile soil, ideal weather conditions, an ideal system of perennial rivers, a wide range of wildlife, wide stretches of natural forests and grasslands, a wide assortment of mineral resources, and a sizeable population of peaceful and hard-working citizens.
____________________________

Bibliography and References

Chilipamushi, D.M., "Investment Promo tion and the Privatiza tion Process in Zambia," in Deassis, N.A. and Yikona, S.M., editors, The Quest for an Enabling Environ ment for Development in Zambia: Selected Readings (Ndola, Zambia: Mission Press, 1994), p. 16.

Klerk, F. W. de, former South African president, quoted in Yalemana, S., "Chiluba Looking for Security in South Africa," Southern Africa Political and Economic Monthly, September 1993, p. 16.

Kyambalesa, Henry, Socio-Economic Challenges: The African Context (Trenton, New Jersey: Africa World Press, 2004).

"Mugabe Returns Zimbabwe to Socialism," Independent Online,http://www.iol.co.za/October 15, 2001.

Nyakutemba, E., "Chiluba Plunges into the Market," New African, May 1992, p. 32.

Ouattara, A.D., "Africa: An Agenda for the 21st Century," Finance and Development, Volume 36/Number 1, March 1999, p. 4.

Pitelis, C. and Clarke, T., "Introduction: The Political Economy of Privatization," in Clarke, T. and Pitelis, C., editors, The Political Economy of Privatization(London: Routledge, 1993), p. 7.

Sanderson, M., quoted in Kyambalesa, H., Quotations of Zambian Origin, Second Edition (Lusaka, Zambia: Apple Books, 1996), p. 34.

Southern African Regional Poverty Network (SARPN), "Major Concerns Relating to the Zambian Economy: A Civil Society Perspective,"
http://www.sarpn.org.za/July 7, 2002.

Union Bank of Switzer landquoted by Reinecke, J.A. et al., Introduction to Business: A Contemporary View (Boston: Allyn and Bacon, 1989), pp. 17 and 27.

"Zimbabwe a Step Closer to Marxist-Style Economy," Independent Online,http://www.iol.co.za/October 17, 2001.

6 comments:

  1. I was wondering if you would consider moving your blog to the 'wordpress' platform?

    In wordpress blogs there is a facility to notify people of comments and posts by email while retaining anonimity. This allows notification to followers of the blog to go and look up the latest items with ease. The recent comments section on the title page of your blog is useful but it can be quickly out of date because it only shows the last five so that comments can be missed.

    The archive section on your blog is superior to Wordpress although that feature may be available on Wordpress also.

    Perhaps it is necessary to amend your own blog to retain the best of your blog and the best of wordpress.



    ReplyDelete
    Replies
    1. Thank you for your question.

      I understand your point about anonymity.

      I cant move it to 'Wordpress'. It is easier to manage on a Google platform because I lead a very busy life. May be if I have money in the future to hire someone.

      Delete
  2. Perhaps it is - Indeco - an attempt to further increase control, patronage and corruption i.e. it is nothing to do with the proposed or publicly stated reasons but entirely to do with the reasons surmised in the first sentence of this comment or some part of them.

    Let not cynicism prevail in the mind but do let honest analysis prevail. In the village the man says everybody has to give 5 dollars to start up such and such a useful project. The people agree that the project will be beneficial and give the 5 dollars but he always said it so he could abuse the people by stealing the givings. He gets rich and the people suffer.

    ReplyDelete
  3. Understood and thanks.

    I am amazed at the quantity and quality of the work you do on this blog considering the other large call you clearly have on your time.

    ReplyDelete
  4. I am sort of sitting on the fence regarding the proposed IDC idea by government. The bigger part of my brain and heart is supporting the idea to establish the IDC and the smaller part is against but not for the reasons outlined in this article. I think my main issue is the lack of a clear legal framework that will deal with some or all of the issues raised in this article.

    Let me quickly say I am not an economist. However my opinion on this is that, INDECO failed (i.e public companies failed) that time because we were in a different historical period. The world was split between capitalism (America and its allies) and socialism (USSR and its allies) and for all our worth's salt as a country we preferred socialism hence we chose a government-led economy. In 1991, we switched to capitalist economic models and propagated private sector-led economy. So we swang from one extreme to another extreme for the lack of a better term.

    My question to you economists therefore is, is there anything wrong to have a mixed economy (government-led coexisting with private-sector-led)? Are you not just being alarmist when you say there will be price controls, foreign exchange regulations and so on. Why cant government owned industries compete on equal footing with private sector? I am thinking all we will need is a regulatory mechanism(maybe competition commission) to ensure public companies do not become monopolies for the sake of it.

    I will be glad to be educated on this one so that I can make up my mind whether to support or not this IDC idea.

    Thanks

    ReplyDelete
  5. The IDC isssue is still in its infancy statges and it will be irrational to write it off completely. There has been no intention that PF Goverment is switching to sociolist policies. There is still a huge private sector boom in Zambia. Even in developed Economies like USA, state entities are there but its how are they run that makes them look like they are privately owned. Most of the large private firms in Zambia are based along the line of rail. There is need for IDC to play a huge role in taking industrial activities to Zambias outlaying areas. Countries South Africa have succesfully seen the value of IDC's. Many local and state goverments in USA have IDC's to help bring development to their coummunities. I also would like to mention that the onus is goverment to present this arguement and seek to establish an holistic legal framework to make IDC make a difference by:

    by providing access to funding and incentives to qualified for profit businesses and not for profits organizations to invest in projects which will lead to the retention and creation of jobs within Zambia and it economic clusters.


    I think we are seeing more action to do reverse the massive unemployment Zambia is facing. It better to do something than nothing at all. The ERA under which INDECO failed were due to Zambia's own foreign/Domestic policy pursued by KK. Global trends are showing are more favarable now than the trends of 30 year ago. The new trends in open trade, technological advancements, improved education is likely to make the new IDC a success.

    ReplyDelete

All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.