Zambia’s recovery plan, Part II: the stimulus plan

Zambia’s recovery plan, Part II: the stimulus plan
Written by Prof Clive Chirwa
Saturday, May 23, 2009 7:44:07 PM

Up until earlier this year, ‘globalisation’ or ‘investor attraction’ was the word on everyone’s lips and was regarded as God send to African countries that at last saw real money being pumped into their economies. The big multinational corporations, market speculators, opportunists for quick bucks and just investors propped by their nations jumped on the band wagon to Africa. Many countries including Zambia bent backwards in pampering them with incentives.

It is now clear that “investor attraction” has failed to rid the world of poverty according to a number of economists in Europe, Japan and USA. Rather than being an unremitting force for our development, “investor attraction” has shown its true colours by abandoning us at the slight drop in commodity prices and hence partly precipitating our recession.

This shows how multinationals have become more powerful than governments, controlling global financial institutions that have marginalised the likes of IMF and World Bank, making their own rules and regulations, and walking into and out of our lives whenever they feel convenient. Hence, fuelling the “race to the bottom” as Zambia searches to attract and retain investments. Meanwhile the so-called “investors” are taking advantage of this crisis to cut jobs and then skim off huge profits while paying very little tax.

I believe in a free market economy and Zambia should embrace every potential contributor to our development. But what this crisis is showing us is that there are some core businesses of a nation that require the tight control of government.

In Zambia’s case natural resources are key to our survival since they provide about 90 per cent of our revenue with copper at the top bringing in about 70-80 per cent of that income. Zambia’s total dependency on copper raw material means that every time its price, set far away in London, fluctuates, it takes the kwacha’s value with it and the people suffer. The exchange rate has followed closely changes in copper prices for decades. What we want is to urgently decouple the kwacha value from copper price. We can do that very easily by innovating and therefore take our copper to finished products, while at the same time proactively creating a market for them.

If we do not do that, large negative effects are expected in output, fiscal and external accounts, and in the financial sector. According to the Word Bank, our account deficit is expected this year to reach 10 per cent of GDP. Two years ago in 2007 it was just 4 per cent. The fiscal deficit has already worsened, led by the low copper revenues and will become worse to reach 3 per cent of GDP this year. The financial sector on the other hand is showing some signs of exposure to domestic and international downside risks. This is how the effects of global financial crisis are affecting Zambia.

Our international reserves, which were nicely and conscientiously built by our government through good governance and prudence are dwindling fast, falling by 28 per cent since their peak of $1.4 billion in July 2008. We must stop this depletion of our reserves by seriously looking into innovation and some slight diversification of our main income spinner wherever appropriate.

Indeed the World Bank has now concluded that for Zambia to survive in the long term, and eradicate poverty, it must diversify its attention from raw material export. By doing so our country will rise again to the growth levels of 6 per cent that we saw happening up to July 2008 and we shall surpass that as our economy structure changes from mono to multi.

In addition to this, we must make sure that this time, our government plays a bigger role in initiating our growth. I have been saying this for years that nobody will come to develop our country. It is our duty as Zambians to do so and not to totally depend on investors who are just temporary participants and heavily governed by the “Invisible Hand” theory first coined by the father of capitalism Professor Adam Smith. According to Professor Smith, this is a concept showing that people act in their own interest and not all self-interest has beneficial effects on the community.

Recently I was invited to Oslo in Norway, the only country in the Western World still recording growth. During lunch we touched upon the economic prowess in this downturn. A comment was made by a good Norwegian friend that “it is a great pity to see Africa not moving at all since the 1960s. Before, it was the British and the French who milked you and now it is the Chinese taking over. Open your eyes, how can you allow to be constantly chocked. It is euthanasia for a nation like Zambia. Look at Norway, our government controls all the North Sea oil reserves to finished products. Our capitalism is different. We believe in private enterprise and free market, but when it comes to natural resources the government makes sure it controls that. This is why we have built $360 billion in reserves. We enjoy a surplus of 11 per cent and our ledger is entirely free of debt, while the USA has a deficit of 12.9 per cent of GDP and $11 trillion in debt. Our GDP per capita is $52,000.

If we left it to investors, we too, would have been milked by oil multinationals”.

It was extremely embarrassing to hear the naked truth; hence I dropped my eyes to avoid contact as I was saying to myself “he is right”. Why can’t we do it ourselves and move out of this self-imposed misery? We have been independent for more than 44 years, but our economy and development has barely moved from the position left to us by the British. It is as though we have been in a coma or hibernation for all these years. That is why I am now seriously advocating using this opportunity of the economic crisis to wake up and really make sure we put up a stimulus plan for us in the short, medium and long term. This time we should not be arm-twisted by the IMF and World Bank to liberalise our economies as we adjust our fiscal structures. We must also improve our current GDP per capita that stand at $1,400 and go back to our path of growth that stood at 6 per cent to greater heights.

The only way we are going to resume the better days and go beyond those yesteryear targets is to build up our international reserves once more through a prosperity route that is stipulated in our stimulus plan. This involves expanding and redesigning the means we generate income. The question is: how is Zambia going to respond to this downturn?

Zambia is not USA, Britain, Russia, German or other countries that have provided multi-billion dollar stimulus plans. We just do not have that sort of money. But we are extremely rich in natural resources despite being poor on the balance sheet. Our challenges are much more complex than other African countries in the sense that we are landlocked, we have inadequate access to markets, poverty is too high, we are too weak in fiscal strategy and dependent on pie-in-the-sky investors to come and show us how to do things. Because of these challenges, Zambia needs a stimulus package to mitigate the contagion of this crisis that originated from the developed world. Our stimulus should properly integrate sets of trade, monetary and fiscal measures. This will provide assistance to facilitate economic adjustment and nurture our investments in human and physical capital. The stimulus plan should provide and support appropriate safety nets for those most vulnerable and most exposed to the crisis such as the mining sector and their suppliers. The private sector and particularly the small and medium enterprises should be propped as they will be the ones to create wealth necessary for poverty reduction once they have been shown the way by giving them innovation tools.

Zambia must not be complacent as to rely on the G20 aid package to Africa of $20 billion plus 0.7 per cent of the stimulus of the developed world to “vulnerable fund for Africa”. It is time we started living in the real world by abolishing the counting of aid as our income in our national budget. This is totally unacceptable and must be deleted in future budgets. Income is something you earn and the stimulus plan here must reflect that.

In the absence of real mega external resources, Zambia should contemplate a modest fiscal stimulus as the way of propping up the economy’s growth. It is unlikely that tax reductions will yield great gains in growth, as many of the efficiency-reducing taxes have already been reduced through enormous unemployment by companies who have gone bust and by those investors who want to maximise their profit. So our major gains will come from expenditure increases. How this is spent is extremely important. Building a conference centre and a football stadium now is ill advised. For the simple reason that although jobs are created in the short term these do not add value to future jobs creation because no money is being made for re-investment. Priority in government expenditure must become the driver the take us out of this recession. This money would have been better utilised in building the manufacturing base. We will come to that later.

In this downturn, the stimulus plan should be able to create jobs and support those existing jobs that are under threat. The more people work, the bigger is the take home pay for the government in the form of PAYE, corporation tax and royalties. To be blunt why not re-acquire some mines into ZCCM? Norwegians, Russians and now USA, Great Britain, Germany are all doing it. Western governments running banks, car industries, mines and so on was never on the vocabulary of those nations. But we are in extraordinary times, and Zambia must now recoup what belongs to the people, that is the only way we will generate reserves towards the sizes of Norwegians and Chinese.

The stimulus should also be directed at real maintenance and construction of infrastructure such as roads, energy or electricity grids, water supply, and the long-term neglected railway system. As a land locked country our railway system needs to be re-built. The longer we leave it the more expensive it will become. Without us having these infrastructures performing perfectly, there will be no development. This is our chance to spend while in the downturn so that we are ready for the big things to come when the market and the world economy is on the upturn. This action will create real jobs. Spending $200 million on non-revenue spinning enterprises like a football stadium and business centre in this downturn is an absurd and myopic strategy. I know His Excellency never made the decision. Wisdom is now required to achieve the most effective sequencing to ensure the stimulus create and stimulate a multiplier effect in sectors with highest potential.

That is why I believe manufacturing is at the top. Many people in Zambia have said we should go the agriculture route. I have a problem with this despite that agriculture is essential. But this will never lift Zambia out of poverty or even create an economic transformation. Agriculture will never employ more people than manufacturing will.

The world around us has shown for instance that Great Britain and America each has 1 per cent and 3 per cent respectively of their total population employed in agriculture and they feed 65 million and 260 million respectively. As you can see agriculture is not a job creation sector, indeed what we want is to mechanise our agriculture and make it more efficient so that we are be able to have two if not three harvests of maize, wheat and other farming products per year. This will boost food reserves and security.

For development and for the purpose of taking us out of the recession, we need stimulus package in ventures that guarantee increasing returns to scale. This is manufacturing, not agriculture or tourism. It is time that our dependency on primary products takes another level to value adding ventures which will create more jobs and expand the revenue base.

We know that Zambia has in the past been growing by 6 per cent. This was because of high copper prices and therefore it was a myth development. If you want to see the real growth, it is better to compare countries by what they made their money from. You will find that high-growth economies have vibrant manufacturing sector. The output shares of manufacturing in national income and exports are good indicators. In Africa, South Africa ranks en par with developed countries in economic terms because of the manufacturing capacity. Zambia had a good percentage of 32 per cent in 1990 as contribution of manufacturing to GDP. This has dropped tremendously after privatisation and we need to go back to that and beyond if we have to develop further. Only this time our manufacturing must concentrate on value addition in copper and other natural resources sold as raw materials.

People might ask, why should we go for manufacturing? It is well established that the sector is superior in productivity increases, economies of scale and spurring all-round linkages. The sector is a big stimulus incentive as it also demands and absorbs a mix of high- and low skilled labour. Only manufacturing will save us. We must really do it in a planned manner to have maximum impact. Like in Norway, I would like our government to create prime value addition industries in copper, cobalt and nickel based industries. Then after that, private entrepreneurs will build up supply and converter chains. A think tank should identify the necessary products and next week I will show you a lot of those that have very high value additions despite using very little base material. Do not miss the third part of the Recovery Plan - The Execution Strategy. You might find some ideas for your business.

If we left it to investors, we too, would have been milked by oil multinationals”.

It was extremely embarrassing to hear the naked truth; hence I dropped my eyes to avoid contact as I was saying to myself “he is right”. Why can’t we do it ourselves and move out of this self-imposed misery? We have been independent for more than 44 years, but our economy and development has barely moved from the position left to us by the British. It is as though we have been in a coma or hibernation for all these years. That is why I am now seriously advocating using this opportunity of the economic crisis to wake up and really make sure we put up a stimulus plan for us in the short, medium and long term. This time we should not be arm-twisted by the IMF and World Bank to liberalise our economies as we adjust our fiscal structures. We must also improve our current GDP per capita that stand at $1,400 and go back to our path of growth that stood at 6 per cent to greater heights.

The only way we are going to resume the better days and go beyond those yesteryear targets is to build up our international reserves once more through a prosperity route that is stipulated in our stimulus plan. This involves expanding and redesigning the means we generate income. The question is: how is Zambia going to respond to this downturn?

Zambia is not USA, Britain, Russia, German or other countries that have provided multi-billion dollar stimulus plans. We just do not have that sort of money. But we are extremely rich in natural resources despite being poor on the balance sheet. Our challenges are much more complex than other African countries in the sense that we are landlocked, we have inadequate access to markets, poverty is too high, we are too weak in fiscal strategy and dependent on pie-in-the-sky investors to come and show us how to do things. Because of these challenges, Zambia needs a stimulus package to mitigate the contagion of this crisis that originated from the developed world. Our stimulus should properly integrate sets of trade, monetary and fiscal measures. This will provide assistance to facilitate economic adjustment and nurture our investments in human and physical capital. The stimulus plan should provide and support appropriate safety nets for those most vulnerable and most exposed to the crisis such as the mining sector and their suppliers. The private sector and particularly the small and medium enterprises should be propped as they will be the ones to create wealth necessary for poverty reduction once they have been shown the way by giving them innovation tools.

Zambia must not be complacent as to rely on the G20 aid package to Africa of $20 billion plus 0.7 per cent of the stimulus of the developed world to “vulnerable fund for Africa”. It is time we started living in the real world by abolishing the counting of aid as our income in our national budget. This is totally unacceptable and must be deleted in future budgets. Income is something you earn and the stimulus plan here must reflect that.

In the absence of real mega external resources, Zambia should contemplate a modest fiscal stimulus as the way of propping up the economy’s growth. It is unlikely that tax reductions will yield great gains in growth, as many of the efficiency-reducing taxes have already been reduced through enormous unemployment by companies who have gone bust and by those investors who want to maximise their profit. So our major gains will come from expenditure increases. How this is spent is extremely important. Building a conference centre and a football stadium now is ill advised. For the simple reason that although jobs are created in the short term these do not add value to future jobs creation because no money is being made for re-investment. Priority in government expenditure must become the driver the take us out of this recession. This money would have been better utilised in building the manufacturing base. We will come to that later.

In this downturn, the stimulus plan should be able to create jobs and support those existing jobs that are under threat. The more people work, the bigger is the take home pay for the government in the form of PAYE, corporation tax and royalties. To be blunt why not re-acquire some mines into ZCCM?

Norwegians, Russians and now USA, Great Britain, Germany are all doing it. Western governments running banks, car industries, mines and so on was never on the vocabulary of those nations. But we are in extraordinary times, and Zambia must now recoup what belongs to the people, that is the only way we will generate reserves towards the sizes of Norwegians and Chinese.

The stimulus should also be directed at real maintenance and construction of infrastructure such as roads, energy or electricity grids, water supply, and the long-term neglected railway system. As a land locked country our railway system needs to be re-built. The longer we leave it the more expensive it will become. Without us having these infrastructures performing perfectly, there will be no development. This is our chance to spend while in the downturn so that we are ready for the big things to come when the market and the world economy is on the upturn.

This action will create real jobs. Spending $200 million on non-revenue spinning enterprises like a football stadium and business centre in this downturn is an absurd and myopic strategy. I know His Excellency never made the decision. Wisdom is now required to achieve the most effective sequencing to ensure the stimulus create and stimulate a multiplier effect in sectors with highest potential.

That is why I believe manufacturing is at the top. Many people in Zambia have said we should go the agriculture route. I have a problem with this despite that agriculture is essential. But this will never lift Zambia out of poverty or even create an economic transformation. Agriculture will never employ more people than manufacturing will.

The world around us has shown for instance that Great Britain and America each has 1 per cent and 3 per cent respectively of their total population employed in agriculture and they feed 65 million and 260 million respectively. As you can see agriculture is not a job creation sector, indeed what we want is to mechanise our agriculture and make it more efficient so that we are be able to have two if not three harvests of maize, wheat and other farming products per year. This will boost food reserves and security.

For development and for the purpose of taking us out of the recession, we need stimulus package in ventures that guarantee increasing returns to scale. This is manufacturing, not agriculture or tourism. It is time that our dependency on primary products takes another level to value adding ventures which will create more jobs and expand the revenue base.

We know that Zambia has in the pass been growing by 6 per cent. This was because of high copper prices and therefore it was a myth development. If you want to see the real growth, it is better to compare countries by what they made their money from. You will find that high-growth economies have vibrant manufacturing sector. The output shares of manufacturing in national income and exports are good indicators. In Africa, South Africa ranks en par with developed countries in economic terms because of the manufacturing capacity. Zambia had a good percentage of 32 per cent in 1990 as contribution of manufacturing to GDP. This has dropped tremendously after privatisation and we need to go back to that and beyond if we have to develop further. Only this time our manufacturing must concentrate on value addition in copper and other natural resources sold as raw materials.

People might ask, why should we go for manufacturing? It is well established that the sector is superior in productivity increases, economies of scale and spurring all-round linkages. The sector is a big stimulus incentive as it also demands and absorbs a mix of high- and low skilled labour. Only manufacturing will save us. We must really do it in a planned manner to have maximum impact. Like in Norway, I would like our government to create prime value addition industries in copper, cobalt and nickel based industries. Then after that, private entrepreneurs will build up supply and converter chains. A think tank should identify the necessary products and next week I will show you a lot of those that have very high value additions despite using very little base material. Do not miss the third part of the Recovery Plan - The Execution Strategy. You might find some ideas for your business.

******************

COMMENTS:

It is fantastic to finally see someone turn away from the doctrine of offering up the economy to foreign corporations (euphemistically called 'foreign investors' - if I'm a fundmanager, and I buy shares in a company - I'm an investor - if I buy a mine, and then run that mine, I'm a miner, not an investor - just had to get that out of the way).

At the same time, the fact that a commercial farm would use less labour than a subsistence farm, is compensated for the fact that only 1/5th of arable land is under cultivation, and only 3% of arable land is under permanent irrigation. Irrigation would double the number of harvests per year. There would be much more work to be done, and it would pay more because of higher productivity per employee. This would create demand for professionals in rural areas - doctors and nurses, lawyers, veterenarians, extension offices, mechanics, etc.

The world around us has shown for instance that Great Britain and America each has 1 per cent and 3 per cent respectively of their total population employed in agriculture and they feed 65 million and 260 million respectively. As you can see agriculture is not a job creation sector, indeed what we want is to mechanise our agriculture and make it more efficient so that we are be able to have two if not three harvests of maize, wheat and other farming products per year. This will boost food reserves and security.

It is true that in industrialized countries, only 5% or fewer of the labour force work in agriculture. However, this is a tribute to the fact that they are nearly completely mechanized. Zambia is not there yet, although it can go there. Today, most farming is still subsistence farming, unmechanized and very labour intensive. To change that, Zambia should not go the way of the United States or Russia, and create huge monoculture agribusinesses, but give a chance for the rise of the commercial farmer. This would create jobs where people live today, in the rural areas, and would not necessitate them to move to the already crowded cities just to find a job. In the EU, the average size of a farm is 90 hectares - Zambia should strive for that too, because it has the greatest opportunity for agricultural diversification, job creation, and wealth creation in the rural areas, where most people still live. It will also slow the urbanisation and rural flight that is plagueing the major cities. In fact, creating more job opportunities in the cities only would actually encourage this process.

Then, there is the issue of government itself. A remnant of the One Party State, is that Central Government is too big, and that there is no subsidiarity and decentralization of budgets and responsibilities to the local council level. Instead of having the taxpayer fund 29 ministries and a large number of political positions that are not required for good governance or democratic representation, the central government should have 10-12 ministries, and the Constitution should delegate the provision of services to local government - education, healthcare, policing, public utilities and administration. Zambia should delegate 50% of national revenues to local government. The spending of 50% of national revenues at the council level will make 100s of millions of dollars available in the rural areas. Note that I am not just for the slashing of the size of government, as neoliberals like Dambisa Moyo or Eddie Cross are. I am for a reprioritising of government functions, from administration and red tape in Central Government, to provision of services by local government. Most of the people working for the government today, would be re-employed at the council level.

Lastly, there is the issue of the mines. Zambia should replace both donor aid and the ineffective taxation of the mines with a single, high tax on turnover. Get rid of all mine taxes except the royalties tax, and raise that from 3% to 20%. If necessary, just confiscate every 5th load that leaves the mines or smelters. That way, there is no confusion about how much a foreign corporation really earned (income tax), what their tax deferments are, amortisation of capital goods, and all the tricks the mines used to turn the burdon of paying tax over to the Zambian worker (PAYE).

Also, Zambia should create copper and other reserves, to support the currency, and create money for reinvesment. As a suggestion, if Zambia created mineral reserves of say $1 billion, this would deflate the currency. The government could then create 500 million and reinflate the currency, and use the money to finance infrastructure, manufacturing or and other projects, and do wo without creating debt, or creating inflation.

Governance - another remnant of the One Party State, is the lack of separation between the Civil Service and elected politicians. The civil service should become more professional and less captive to the political class. This can be achieved by generating promotion from within the civil service, and limiting appointment of civil servants by politicians, including the President, to the top level only. A twin issue to this, is the Parastatals. They need to operate within a Constitutional framework, which protects them from political interference, especially political appointments to management positions (no more cousins of important politicians), and as part of the civil service, have appointments made on merit, and have oversight only from other branches of the civil service, and parliamentary committees. Which brings me to the role of parliament. Parliament needs to review every major project and loan acquired, as is being discussed in the NCC right now, and has wide support, even though it did not get enough votes this time. Especially opposition MPs can play a critical role in ensuring that money is not wasted and corruption is detected early on.

Monitoring and auditing of projects on an ongoing basis should become part of the process of getting government contracts. There are literally hundreds of millions of dollars lost in the procurements and government contracts, even as government officials raise the objection of 'limited resources' whenever they don't want to do something. Obviously this has to change, and an effective government is also an efficient government.

I think prof. Chirwa, as an engineer, perhaps has a slight professional bias towards industrial developoment. And I don't disagree that Zambia must take the steps necessary to keep every manufacturing job in the country, instead of importing finished goods and even create new ones from turning for instance it's copper into finished goods. I don't disagree with that at all, I applaud it. However, a house cannot be built on quicksand. More than finished goods, more than even jobs, people need food. This is only two steps in the hierarchy of human needs, after water and air. This is why we must secure the food supply, and why Zambia must develop it's massive natural resources of water for irrigation, and put the 80% of arable land that remains unitilized, under cultivation. It cannot produce finished goods, only to import the food it needs. It would be wasteful, and would undermine the country's sovereignty by putting the food supply into foreign hands. This is why I believe that Zambia must first utilize it's natural resources to become not only a net food producer, but do it in a way that raises incomes of ordinary people where they live, by getting them involved in agriculture, as well as lowering the price of food by producing more of it.

Now industrialisation and the professionalisation of agriculture are not mutually exclusive. Commercial farmers need mechanized tools, and rather than import them wholesale from Chinese parastatal companies, why not manufacture or at least assemble tractors and attachments in Zambia itself? Tooling spare parts would also increase manufacturing jobs. Why not produce biofuel on a small but widespread scale, to reduce the importation of fossile fuel from Saudi Arabia, and keep that money circulating within the economy and reduce the need for foreign currency?

Only 3% of Zambia's land is under cultivation, and yet it has many huge rivers and floodplains, just waiting for small dams and irrigation for local farmers. Irrigation would make multiple harvests per year possible, prevent the annual flooding of areas and the loss of life and property, and general disruption and hunger that result.

This could be huge works projets, combining the National Service, unemployed miners (who have experience with earth moving equipment), and traditional authorities to mobilize labour, where the government could pay people $5,- per day, to build roads, dams, bridges, and create irrigation districts. This would raise incomes, creating markets for new consumer products, where first there were none. If those products are manufactured in Zambia, that money returns as wages for other workers, completing the cycle, and allowing the government to recoup it's investment bit by bit, every time someone pays income tax.

Rather than seeing industrialisation and an agrarian revolution as competing priorities, they can be integrated to form a single plan of action, supporting eachother, while building the economy to greater heights.

That is why I believe manufacturing is at the top. Many people in Zambia have said we should go the agriculture route. I have a problem with this despite that agriculture is essential. But this will never lift Zambia out of poverty or even create an economic transformation. Agriculture will never employ more people than manufacturing will.

I would say that agriculture already creates more jobs than manufacturing and mining combined. Mining only employs 58,000 people out of Zambia's 5 million strong labour force. There are millions of subsistence farmers. Also, even commercial agriculture can be labour intensive. There are certain things that cannot be automated, like growing and collecting saffron, which is the most expensive herb today. Greenhouses can be labour intensive too.