Explaining Zambian Poverty: A History of Economic Policy Since Independence

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 Alan Whitworth

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The paper attempts to explain why, despite abundant natural resources, fifty years after Independence or withinemail Zambia has some of the worst poverty Africa. High copper prices meant the UNIP government enjoyed substantial fiscal resources in the decade after Independence, facilitating a rapid expansion in Name social infrastructure. However, investment undertaken in response to Rhodesia‘s UDI (oil pipeline / pipeline  / refinery, TAZARA) led to a permanent increase increase in costs. Much was also wasted on an extraordinary expansion of the state‘s role in the economy and a vain attempt at industrialisation through import substitution. Nationalisation of the copper mines in pa rticular proved disastrous. Increased public service wages and subsidies Emailwere no longer affordable once mineral prices and taxation collapsed in the mid1970s. Anticipating a rebound in prices, government chose to borrow rather than cut expenditure. As prices continued falling, fiscal deficits and debt became unsustainable. Lack of foreign exchange, compounded by political interference, led to financial losses by parastatals – parastatals  – adding  adding to fiscal pressures. By the 1980s public expenditure was largely confined to debt service, wages and subsidies – subsidies – crowding  crowding out expenditure Password on basic social services of most benefit to the poor. (at least 6 characters)

The reforms of the MMD government from 1991 eventually succeeded in reversing the downward spiral. Trade liberalisation, elimination of most subsidies and aShow major privatisation programme stemmed the fiscal haemorrhage. Though controversial, privatisation of the mines was a turning point. Substantial investment in mining triggered a sustained period of rapid growth, boosted by rebounding copper prices updates from Scribd from 2004. With debtSend reliefme and increasing mineral taxation, this helped establish fiscal and macroeconomic stability – stability – creating  creating real fiscal space. While this facilitated increased expenditure on basic services, much of the proceeds of the secon d copper boom were wasted on uneconomic road projects and poorly targeted agriculture Poverty reduction was limited to the urban population. Signsubsidies. Up The PF government since 2011 has revived a number of populist UNIP policies, suggesting that the lessons of that era poorly understood. Byare registering a Scribd account, you agree to our Terms of Service and Privacy Policy

I.

Introduction

 At Independence in October October 1964 Zambia had had the fourth highest GDP per Already have an account? Sign in capita in Africa (www.NationMaster.com). (www.NationMaster.com). As the fiftieth anniversary anniversary of Independence approaches approaches it has some of the worst social and poverty indicators on the continent, despite sustained GDP growth since the turn of the century. This paper attempts to explain why, despite a rich natural resource endowment and relative peace and political stability, poverty has increased in Zambia. The history of Zambian economic policy is of more than just academic interest. It will be argued that, while external factors - notably Southern Rhodesia‘s UDI and the collapse in copper prices from fr om 1974 – contributed – contributed significantly, Zambia‘s poor poor economic performance is largely explained by misguided macro and micro economic policies adopted during the Kaunda era. The damage caused caused by these policies, some some of which persist to this day, day, is poorly understood understood by the Zambian Zambian public and and politicians. As a result, rather than learning from past mistakes, the Patriotic Front government elected in 2011 appears to be repeating some of them. The paper has one conspicuous omission. The majority of Zambians are dependent on agriculture, and the unambiguous failure of successive governments‘ agriculture policy is arguably the single most important reason for increased poverty. However, this is such a large subject that it merits a separate standalone paper.

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The Zambian Economy at Independence

Zambia‘s colonial inheritance was was unusual. Instead of being a separate colony, Northern Rhodesia was part of the Central African Federation (of Up With and Google Northern and SouthernSign Rhodesia Nyasaland – Nyasaland – now  now Zambia, Zimbabwe and Malawi respectively) respectively) between 1953 and 1963. The Federal capital was with email Salisbury (now Harare). orFrom the outset the benefits of Federation Federation were very very unevenly distributed, with industry and infrastructure concentrated in Southern Name Rhodesia. Most of the tax from f rom the Northern Rhodesia copper industry was 1 diverted to the south . Sign Up With Facebook

Email Under the Federation Northern Rhodesia ‗lacked many of the governmental functions – functions – fiscal,  fiscal, industrial and commercial policy, transport and power, overall control of educational policy, defence and foreign affairs – affairs – that  that any independentPassword country (and even any fully fledged colony) would regard as (at least 6 characters) indispensable. Many of the ministries with which Zambia began life had only been in existence for a few months‘ (Martin 1972:47). Show

 As a result, Zambia inherited much less at independence in terms of Send me updates from Scribd infrastructure, industry and public administration than most ‗normal‘ for mer colonies. Essentially, the inheritance comprised a thriving copper mining industry, the infrastructureSign needed Up to support it (particularly the railway through Southern Rhodesia to Mozambican ports and hydroelectricity from Kariba) - andBylittle elsea. Scribd else. Manufacturing was limited to plants supporting supporting the registering account, you agree to our mines and a handful industries where proximity to the final fi nal market was Termsof of Service and Privacy Policy important (eg breweries, maize milling, cement). have‗found an account? Sign Most damagingly,Already Zambia itself atinindependence independence with a smaller number of educated Africans in relation to the population than virtually any other of Britain‘s African colonies. colonies. In 1963 there were fewer than 100 100 Zambian university graduates and fewer than t han 1,000 secondary school graduates …..[The] lack of skilled manpower at all levels was probably the biggest single constraint on Zambia‘s development in its early years‘ (Martin 1972:49).

Zambia‘s economic prospects were also constrained by geography. Being a large, sparsely populated country meant that providing social infrastructure (health, education, roads) would inevitably i nevitably be relatively expensive per person. Its small population and domestic market meant there was limited scope for manufacturing – manufacturing – unless  unless export markets could be accessed. However, trade prospects were limited by being landlocked and poor transport links with all neighbours apart from Southern Rhodesia. On the other hand, Zambia also had some substantial advantages relative to other former African colonies. Foreign reserves in 1965 were equivalent to nine and a half months import coverage (IBRD 1966:14). Most obviously, Zambia had some of the richest mineral deposits in the continent and was the 1

‗The Federal Treasury estimated that during the nine years from 1 July 1954 to 30 June 1963, Northern Rhodesia contributed £201.3 million to the Federal current revenues, while only £126.3 million was spent in Northern Rhodesia, giving a surplus of £75.1 million‘ (IBRD 1966:7).

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fourth largest copper copper producer in the world. On the eve of Independence Independence Zambia bought back Sign the mineral rights (and royalties) of its own sub-soil Up With Facebook  riches, which the British South Africa Afr ica Company had owned since 1891. Now that taxation of the copper industry was no longer siphoned off by the t he Sign Up Withcould Google Federation, the new government look forward to a substantial stream of fiscal revenue. Copper contributed 93% of exports exports and 71% of government government or with email revenue (equivalent to 18.5% of GDP) in 1965 and more than half of governmentName revenue every year until 1971 (Table 1). Minerals were by no means Zambia‘s only natural resource. One of the largest countries in Africa by area, it had substantial land resources; 39 million Email hectares, 58% of which was classified as having medium to high potential for agricultural production. It also had an excellent climate for agriculture and was well endowed with water resources – resources – valuable  valuable both for agriculture and for generating hydro-electricity. Finally, with Victoria Falls and some of the best Password (at least characters) Africa, there was considerable potential for game reserves in 6southern tourism. Show The political context also appeared relatively favourable. The transfer of Send me updates from Scribd power had been been entirely peaceful. peaceful. No ethnic group group was dominant. With a much smaller settler population than Southern Rhodesia, the new government did not have to cater to settler interests and could focus entirely on the needs Sign Up of the African majority. majority. Inheriting little meant starting with a ‗clean slate‘. With its rich natural andaccount, good you f iscal fiscal therefore, Zambia started By resources registering a Scribd agreeprospects, to our life with great ‗potential‘ (an over  -used -usedPolicy term in the Zambian context). This Terms of Service and Privacy paper attempts to explain why, fifty years later, so little of this t his potential has been realised. Already have an account? Sign in

The paper divides the history of Zambian economic policy into four periods: 1. Independence to the mid-1970s 2. Mid-1970s to 1991 3. 1992 to 2011 4. 2011 to 2013 Given the prominent role that copper has played throughout, it starts with an account of the key developments in the Zambian copper industry from the opening of the first mine in 1929 through to the modern day. III.

Copper Production and Revenue

The fortunes of Zambia‘s copper industry have been closely correlated with those of the formal economy since well before Independence. The main links are: (i) the industry‘s demand for Zambian goods and services; (ii) employment; (iii) foreign exchange; and (iv) government revenue. Although copper represented between 38% and 48% of GDP in the five years after Independence (Table 1), links with the rest of the economy have always been weak. Mining is an enclave industry everywhere, with few f ew backward and forward linkages; most inputs are imported, while processing beyond smelting / refining into cathode is rarely economic. It is also a capital-intensive industry, creating relatively few jobs. Direct employment in Zambia‘s copper mines has rarely exceeded 50,000, or 10% of the formal labour force, though many other 3

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 jobs are created indirectly. indirectly. Mining is also much the most important source of foreign exchange. exchange. Except for the the period 1998 1998 –  – 2003  2003 (when it averaged Sign Up With Facebook  64%), copper has always represented at least 75% of Zambian exports. Upfor With Google privileged minority, and with profits With few linkages, jobsSign only a relatively accruing to foreign owners, mining‘s greatest value to the economy is its or with email . If productively invested, revenue from contribution to government revenue mining can benefit Name the entire population. This section focuses on mining‘s contribution to public revenue. Later we examine how effectively it has been been invested. Email  As in any business, gross gross revenue from copper copper is determined by two variables variables  – price  – price and production volume. Figure 1 presents trends in both world copper prices (US Dollars per ton, right axis) and Zambian copper production (metric tons, left axis) for the period 1930 to 2010. To allow comparability over such Password (atprice least 6 characters) a long period data is shown in constant 1998   US Dollars. constant 1998  US Show

We start with prices. Northern Rhodesia started producing copper in 1931, during the GreatSend Depressio Depression. n. From a low of $1,520 per ton in 1932 1932 world me updates from Scribd prices rose progressively, if unevenly, for the next four decades. At Zambian Independence in 1964 the price was $3,750. Prices continued rising – rising – with  with fluctuations - for the next decade Sign Up and reached a peak of US$5,630 per ton in 1974. In late 1974 prices started a long period of decline, falling to $4,290 per ton in 1975 (all 1998 constant prices). While the immediate trigger was the By registering a Scribd account, you agree to our global recession Terms following theand 1973 oilPolicy crisis, the price collapse also ‗reflected of Service Privacy fundamental shifts in patterns of base metal use, technological innovation in communications, and rapid growth of world copper supply‘ (McPherson AlreadyPrices have an continued account? Signfalling in 2004:305 and 40-41). in real terms – terms – again  again with fluctuations - until 2002, when they hit an all-time low of $1,510. They then rebounded dramatically, recovering in five years all the losses of the previous 27, driven largely by growing demand from China. A new peak of $5,690 was reached in 2007. Prices dipped in 2008 and 2009 as a result of the global financial crisis, before recovering in 2010. Turning to production, Figure 1 shows a strikingly similar pattern in Zambian copper output to the price trend. trend. There was a progressive progressive increase up to 1969, before a fatal cave-in and flooding at the Mufulira mine (25% of output) in 1970 led to a temporary fall in output. Production recovered to 713,000 tons in 1976 (Table 1) before the onset of a long period of decline between 1977 and 1998, when when output was just 256,000 tons. tons. Following privatisation of of the mines and substantial foreign investment (including two major new mines, Kansanshi and Lumwana), production rapidly rebounded from 1999, boosted by the increase in copper prices from f rom 2004. The collapse in copper production was due to a number of factors. Continuous maintenance and investment is needed in mining to maintain, maintai n, let alone increase, output because ore grades decline and mineral deposits become less accessible (more costly) at greater depths. Maintenance and investment in Zambia‘s mines tailed off during the 1970s for a number of reasons. Firstly, in 1969 the the Government acquired acquired 51% of the equity equity in the 4

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two major mining groups, to be paid out of future profits - backed by government guaranteed bonds. Agreements were signed with both groups to Sign Up With Facebook  ensure continuity in management. However, in 1973 the Government cancelled the agreements and paid off the bonds in full. This is i s discussed Sign Up With Google below. or with email Production and World Prices, 1930 - 2011 Zambian Copper

Figure 1

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Sources: Based on Fraser and have Larmer Figure Already an (2010: account? Sign1) in 1) Production data 1930 – 1930 – 1963,  1963, United States Geological Survey Minerals Yearbook (various years), available online at http://minerals.usgs.gov/minerals/pubs/commodity/copper/index.html 2) Production data 1964 – 1964 – 2011,  2011, Bank of Zambia 3) Price data from U.S. Geological Survey (2011), copper statistics, in Kelly, Kelly, T.D. and Matos, G.R., comps., ‗Historical statistics for mineral and material commodities in the United States: U.S. Geological Survey Data Series 140‘, available online at http://pubs.usgs.gov/ds/2005/140 http://pub s.usgs.gov/ds/2005/140

These abrupt changes discouraged further investment by the former owners. Henceforth, investment would have to come from government. However, as shown below, the collapse in copper prices from 1974 triggered both a fiscal  crisis, which drastically reduced public resources available for investment, and a foreign exchange crisis which made it difficult to import essential inputs. Falling prices also hit corporate earnings, which were sometimes insufficient to cover spare parts and maintenance, let alone new investment. Meanwhile, the sealing of the Rhodesian border between 1973 and 1978 and the liberation wars in Angola and Mozambique significantly increased transport costs. These problems were compounded by pressure for rapid Zambianisation of management positions, increased political interference and spending on unprofitable non-mining activities.2 ‗By the early 1990s, ZCCM [Zambia 2

 Sardanis (2003:297-299) (2003:297-299) claims ZCCM became a ‗state within a state‘ and that management ‗yielded to the whims of the Government and …transformed ZCCM from a respectable mining group into a mindless conglomerate encompassing all sorts of irrelevant

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Consolidated Copper Mines, the state mining conglomerate] had been drawn so far into the indirectSign financing of state and party activities that rents in t he Up With Facebook  mining sector had been all but eliminated…..Between eliminated…..Between 1997 and 1998, ZCCM‘s reported pretax losses totalled approximately US$650 million – Sign (Adam Up Withand Google almost $1 million per day‘ Simpasa 2010:63-65). 2010:63-65). As prices continued falling, the mines entered a downward spiral of falling earnings, or withwhich email was only halted by privatisation. maintenance and production Name

The decline in copper production is frequently attributed to falling prices. However, a comparison with Chile is revealing. The level of copper production was similar in Chile and Zambia in the 1960s. However, despite facing the same Email prices as Zambia,  copper production in Chile increased  by  by an average of 4.1% pa in the 1980s and 11.0% pa in the 1990s (Meller and Simpasa 2011:15). Like Zambia, much of Chile‘s copper industry was nationalised in the early 1970s. The key difference was that, whereas the Chilean government treated its mines as a Password business and(atinvested heavily in them, GRZ ‗raided‘ them f or  political  political purposes. 3 least 6 characters) Show

Figure 1 shows how the decade between Independence and 1974 was a boom period for Zambian copper revenues, with both prices and production at Send me updates from Scribd historic highs. Following privatisation of the mines and the rebound in prices since 2004, copper revenues are booming again. Sign Up

Copper’s contribution to GDP and GRZ Revenue, 1964 -1978

Table 1

 Year

1964 1965 1966 1967 1968 1969 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978

By registering a Scribd account, you agree to our Production Contribution to GDP Contribution to Revenue Terms of Service and Privacy Policy MT ‘000 Kw million % Kw million % of revenue % of GDP

632 696 623 663 665 748 683 633 698 681 700 619 713 660 656

290 40 Already379 have an account?44 Sign in 379 39 411 38 637 48 457 36 268 23 317 23 506 32 607 32 204 13 330 18 223 11 272 12

57 134 163 146 183 237 218 114 56 108 341 59 12 -1 -

53 71 64 53 60 59 52 36 19 29 53 13 3 -

18 19 15 17 18 17 10 4 7 18 4 1 -

Source: Production data from Bank of Zambia; revenue data from Meyns (1984:8) based on Zambia Mining Year Book, 1969 - 1978

businesses‘ such as maize milling, dry cleaning, commuter trains, farming, tractor assembly and tourist resorts. 3 Total ‗mineral rent between 1970 and 2010 was US$ 15 billion [in constant 2000 prices].  Assuming that production had remained constant around 700,000 tons each year up to 2010, and applying average annual copper prices for each year, Zambia total mineral rent would have been around US$ 60 billion. Under these assumptions, Zambia‘s policy cost it US$ 45 billion of lost rent‘ (Eunomix 2013). 4  Production was extraordinarily high in 1969 because of additional processing (25-30,000 MT) of concentrate stockpiled from earlier years due to transport problems.

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What has been the impact of the two booms in copper revenue on public  revenue? Since no dividends div idends were paid during the period of majority state Sign Up With Facebook  ownership of the mines, public revenue from mining mi ning essentially comprises taxation. Mineral taxation is a function of profits and the mineral tax regime. Sign Up With Google contribution to government finances Table 1 illustrates mining‘s extraordinary during the first boom. High copper prices meant the mines earned substantial or with email profits. The mineral tax regime was highly effective in capturing a large proportion ofName these profits – profits – some  some 70% - for government. Mineral tax receipts were highest between 1965 and 1970, contributing between 52% and 71% of government revenue and equivalent to 15% - 19% Email of GDP. These are exceptionally high figures for a non-oil exporting country.5 In addition, while data is not available, much personal income tax and indirect tax revenue was also derived from the mining sector. As a result, r esult, the Zambian GovernmentPassword had access to substantial financial resources in the first decade (at least 6The characters) of Independence. extraordinary expansion expansion in public services and and in the role of the state described below was largely financed by mining. Show  Apart from 1974, when the copper copper price reached its highest highest real level in half a Send me updates from Scribd century, mining tax receipts dropped sharply after 1970 - and had completely evaporated by 1977 (Table 1). This reflected mainly the fall in gross revenues revenues (and profits) as a result of Sign falling prices. However, it was aggravated by a Up prices. change in the tax regime in 1970. Until 1970 mines paid standard company income tax atBy45% of profits, royalties of 13.5% registering a Scribd account, you agree to our of the copper price per ton less K16 and a special (‗windfall‘) tax of 40% of the London Metal Terms of export Service and Privacy Policy Exchange price per ton above K600. In 1970 royalties and export tax - taxes on production, payable regardless of profitability - were abolished. They were Alreadytax have an profits account? at Sign in with standard income tax (now replaced by a mineral on 51%, 35%) payable on the balance of profits. While the effective tax rate of 68% differed little from before the change, tax was now solely dependent on profits (World Bank 1972: Annex, p.7-9). As profits slumped, so did taxes. GRZ received negligible mineral revenue between 1977 and 1983, when it introduced a Mineral Export Tax of 4% (increasing to 13% in 1985) of the gross value of copper exports. Mineral revenues averaged just 2.4% of GDP between 1985 and 1991 (World Bank 1992:6). However, by the mid-1990s ZCCM‘s finances had deteriorated so much that, instead of receiving tax revenue from ZCCM, government was increasingly forced to bail it out.  A decade after privatisation, with with both production and prices at similar similar real levels to those of the late 1960s, many Zambians expected similar levels of mineral tax revenue to the previous boom. However, this has not materialised. Whereas mining tax was equivalent to a cumulative 104% of GDP between 1965 and 1970 (Table 1), the cumulative figure for 2006 to 2011 was just 12.6% of GDP (Whitworth 2013: Table 1).6 This is a complex, contentious 5

Total  GRZ  GRZ revenue in 2012 was equivalent to 23.2% of GDP, of which Mining represented

3.8%. 6  These figures are not strictly comparable because of the deterioration in the accuracy of national accounts in recent years and the under-estimation of GDP.

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subject and a detailed explanation is beyond the scope of this paper. Following is a brief summary of the main factors. Sign Up With Facebook

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Firstly, the mines were privatised in the late 1990s when they were incurring With Google heavy financial losses Sign and Up copper prices were at historic lows (Figure 1). Selling at the bottom of the market, GRZ was in a weak negotiating position or with emailtax concessions in the Development and was forced to offer generous  AgreementsName negotiated with the buyers. Secondly, negotiated Secondly, the huge maintenance backlog at the privatised mines meant the new owners had to invest substantial amounts just to clear the backlog - in addition to new investment. Most tax regimes allow accelerated depreciation of investment to be deducted from taxableEmail profits and allow tax losses to be carried forward to future years. Zambia‘s regime was unusual only in allowing investment to be fully  depreciated in the year of investment, instead of being spread over a number of years. In these circumstances one would not expect mines to have positive Password (at least 6 characters) taxable income until several years after financial f inancial profits are first declared. Show

In addition to the above ‗legitimate‘ reasons for delayed / reduced reduced mining tax, there have beenSend allegations of corruption in negotiating the Development me updates from Scribd  Agreements and of transfer transfer pricing by some mines. While these are not considered here, it would be very difficult diffi cult for the Zambia Revenue Authority to effectively police transfer pricing Sign Up if it were going on. Frustrated atBythe low levels mining the copper boom, in 2008 registering a Scribdof account, you tax agreedespite to our GRZ revoked theTerms Development and introduced a number of new of Service and Agreements Privacy Policy tax measures. The mining tax regime was revised again in 2009, 2011 and a nd 2012 (Manley 2013). The most significant single measure was the increase in Already an0.6% account? in sales value in the Development the mineral royalty ratehave from ofSign gross  Agreements to 3% in 2008 and and to 6% in 2012. Mining tax revenue revenue increased from 0.5% of GDP in 2005 to 3.8% in 2012 – 2012 – a  a result of both tax reform and continued growth in copper copper revenues (Whitworth 2013: 2013: Table 1). While well short of the 1960s levels, significant mining revenue was again available to fund expanded public expenditure. IV.

Economic policy from Independence to the mid-1970s

The broad economic objectives of the new government were ‗to diversify production to make the economy less dependent on a single commodity, involving both the encouragement of new industry and a radical r adical improvement in agriculture, and to step up as fast as possible the rate of social investment in education, health services, roads‘, etc (Martin 1972:54). While, as discussed below, successive governments‘ industrialisation (and agriculture) policies have largely failed, significant investment in social infrastructure was made in the early years. Most of the country‘s education education and health facilities were constructed during the decade after Independence7. A major road construction and upgrading programme was also undertaken, with most of the 7

Between 1965 and 1975 Zambia education expenditure averaged 14.4% of total government spending and 5.1% of GNP, well above typical levels elsewhere. There was a dramatic increase in enrolment at all levels. ‗The results have been a truly impressive expansion of formal and vocational training facilities‘ (World Bank 1977:117).

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trunk network paved and an extensive network of unpaved secondary and feeder roads connecting remote areas. Sign Up With Facebook

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The government was determined to build an industrial sector, which was seen Sign Up With Google  independence. as the key to diversification and   independence. It was was assumed assumed economic  initially that this would be driven by the private sector. Industrialisation was to or with email be achieved through import , reflecting the prevailing thinking in substitution the development Name literature at the time. The idea was that, by offering protection from foreign competition through tariffs8 and non-tariff measures, firms would be induced to manufacture domestically goods which had previously been imported. While costs and prices would be higher i n the short Email term, the implicit assumption was that growth and economies of scale would eventually reduce costs. The Role of Password the State 6 characters) Zambia was(ataleast mixed economy economy at Independence. Independence. While it inherited a number of public enterprises - eg electricity, rail and air transport, agricultural Show marketing and development and rural sector financing - most commercial activity, dominated by mining, was privately owned. Initially, the government Send me updates from Scribd appeared content with this arrangement.  A decade after Independence Independence the landscape landscape had been completely completely Sign Up transformed. As shown below, below, the industrial sector had expanded expanded enormously but driven aby theaccount, state,you not theto private sector. The World Bank By registering Scribd agree our summarised the situation in the mid -1970s Terms of Service and mid-1970s Privacy Policy as follows: ‗State-controlled enterprises dominate Zambia's economy. They play a key role in almost all major economic sectors, including Zambia's Already have an account? Sign in mining industry, manufacturing, wholesale and retail trade, energy, transport, finance, hotels and restaurants, and agricultural services and marketing. In 1975 the Zambia Industrial and Mining Corporation (ZIMCO), the giant state-owned parent holding company embracing some 73 state controlled subsidiaries, reported a turnover of K 1.2 billion [US$1.8 billion], total net assets of K 1.5 billion [US$2.3 billion, of which the mines accounted for about 80%], total employment of over 100,000 persons or close to 25% of total national wage employment. Including an additional 14 major statutory bodies and corporations, it is estimated that well over half of Gross Domestic Product per year originates in the parastatal sector and that parastatals together employ  (World Bank 1977:i). at least a third of total national wage employment’  (World

Reading the previous paragraph today the extent of state domination of the economy appears appears extraordinary. It was one of the most remarkable economic economic developments in post-colonial Africa, with profound consequences for future generations. In just a decade Zambia Zambia had gone from a predominantly predominantly private economy with very weak public institutions and fewer than 100 university graduates to a country where the state dominated not just the ‗commanding 8

 During much of the 1970s the nominal rate of protection for all goods was estimated at 34%, and the effective rate at 160%. As a result, domestic sales were much more profitable than exports (World Bank 1993:17).

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heights‘ of the economy but virtually all medium and large scale business.9 It is hard to think t hink of a successful modern economy with anything like this degree Sign Up With Facebook  of state control. It is now widely recognised that governments governments are ill equipped equipped to undertake such commercial activities as manufacturing and agricultural Sign Up With marketing, let alone wholesale andGoogle retail trade, t rade, hotels and restaurants. How did this come about? or with email

The growth Name of the state took three distinct forms: 1. Investment to reduce dependence on Southern Southern Rhodesia following its Unilateral Declaration of Independence (UDI) in November 1965; 2. Direct investment in large scale manufacturing where the private sector was Email unwilling to invest; and 3. Nationalisation of private enterprises. 1) UDI Password leasta6 profound characters) impact on the Zambian economy, the effects of UDI in 1965(at had which are still felt today. today. Its colonial history had tied Zambia‘s economy economy firmly Show to that of its southern southern neighbour. Virtually all its international trade was transported through Rhodesia by rail or road – road – the  the only paved roads out of the Send me updates from Scribd country went south. Fuel was imported via the pipeline from Beira to the Rhodesian refinery at Umtali. Though it was jointly owned, the power station on which the copper minesSign depended was situated on the south bank at Up Kariba. Zambia suddenly ‗found itself in the forefront f orefront of the economic war that broke out between Rhodesia and the ofour the world…. Many of the By registering a Scribd account, you rest agree to sanctions invokedTerms against Rhodesia much more quickly and of Service and Privacyworked Policy devastatingly against itself.‘ For example, ‗the oil embargo cut off Zambia‘s supplies, too, and it had to depend on a ridiculously elaborate and expensive Already have an account? in airlift over distances of upwards of a Sign thousand miles‘ (Martin 1972:52-53). 1972:52-53). While sanctions caused considerable short term disruption, the fiscal damage was limited by booming revenue from mining. mi ning. However, the infrastructure investments GRZ was forced to undertake to reduce dependence on Rhodesia and the impact of sanctions had far greater long term significance for the economy. They were undertaken for urgent strategic reasons, rather than any great desire for an increased role for the state in the economy. Following the oil embargo, Zambia had to make urgent alternative arrangements to import fuel. A contract was signed (by Indeco – Indeco – see  see below) in 1966 for an Italian financed f inanced and constructed 1,700 km pipeline from the refinery at Dar es Salaam to Ndola. The TAZAMA pipeline pipeline was jointly owned by the Zambian (65%) and Tanzanian (35%) governments; oil products started flowing in 1968. Subsequently, the Indeni refinery was commissioned at Ndola in 1973. A blend of crude and finished finished products is imported and then refined and separated at Indeni to meet the Zambia market mix. The pipeline played a critical role during the t he Rhodesia crisis. However, following Zimbabwe‘s independence independence in 1980, much of TAZAMA / Indeni‘s rationale 9

Total parastatal assets increased from K 234 million in 1964 to an estimated K 2 billion in 1976 (World Bank 1977:i).

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evaporated and it soon became a liability. Indeni‘s I ndeni‘s small aging plant could not compete with modernSign refineries, while distributing fuel f uel throughout a territory Up With Facebook  as large as Zambia from a single point (Indeni) was more costly than direct import of finished products – products – due  due to high internal transport costs. Unable to Sign Up /With Google bring itself to close TAZAMA Indeni (with the loss of 600 jobs), instead of liberalising fuel imports, the Government has protected its monopoly with a or with email 25% import duty on finished products. As a result, Zambia today has among the highest fuel world – with  with obvious implications for Namecosts in the world – competitiveness and poverty (Whitworth 2014). Other major energy sector investments undertaken to reduce dependence on Email Rhodesian imports include the Kafue Gorge and Kariba North Bank hydroelectric schemes (commissioned in 1972 and 1977 respectively) and Maamba Collieries. While Kafue was clearly economic, the collapse in copper production from 1977 meant the extra 600 MW generation capacity at Kariba Password least 6 characters) unutilised for two decades - at huge economic cost North Bank (at was effectively (Whitworth 2014). The coal deposits deposits at Maamba were developed in 1968 Show mainly to meet the needs of of the copper mines. However, once Indeni Indeni was commissioned in 1973 the mines switched from coal to heavy fuel oil. Send me updates from Scribd In the short term, Zambia responded to the need to re-route its international trade by establishing a large-scale Sign Up road haulage operation (400 trucks) on the 1,600 km ‗Great North Road‘ between Dar es Salaam and the line of rail at Kapiri Mposhi. ZambiaaTanzania Road Services, a ‗public private partnership‘ By registering Scribd account, you agree to our between the Zambian Tanzanian governments and Italian financiers and Terms ofand Service and Privacy Policy operators, also negotiated by Indeco, became Zambia‘s principal freight carrier for a decade from 1966 (Sardanis 2003:180). Already have an account? Sign in

The long term solution was thought to be a new rail route to Dar es Salaam. The idea had been rejected as uneconomic by the World Bank in 1964, but UDI changed everything. In 1970 the Chinese Chinese government offered to construct a line from Dar es Salaam to the Copperbelt and provided a US$400 million interest free loan to t o the Tanzanian and Zambian governments to finance construction of the line and procurement of rolling stock. The Tanzania Zambia Railway (TAZARA) commenced operations in 1976 and in 1977 transported 81% of Zambia‘s exports and 85% of its imports (World Bank 1981: Tables 4.05 and 4.06). However, the following year rail services to the south were resumed because of reliability problems pr oblems with the line and congestion at Dar es Salaam harbour. Zimbabwe‘s independence in 1980 removed TAZARA‘s raison d’etre completely. It has never made a profit and soon became a white elephant. With a design capacity of 5 million tonnes a year, freight traffic has never exceeded 1.2 million tonnes (in 1986). It is questionable whether there was enough freight for one railway line to operate profitably once copper production started its long decline in 1977, let alone two lines. By the time copper production rebounded in the 2000s the mines had little need for railways because the road network had greatly improved and, following the end of apartheid, a completely new trucking industry was offering highly competitive competitive freight rates between between Zambia and South South Africa. So instead of securing Zambia‘s routes to the ocean, TAZARA‘s construction 11

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meant that neither railway was profitable, leading to higher unit costs and the t he deterioration of both systems (Raballand and Whitworth 2014). Sign Up With Facebook

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 All the above investment investment decisions were entirely reasonable reasonable in the context of Sign Up With Google and caused lasting damage to t he UDI, but they were enormously expensive economy. or with email

2) Direct investment  Name While its initial policy was to leave industrialisation largely to the private sector, the Government was prepared to invest itself (sometimes in joint ventures) in projects that were deemed strategic str ategic and/or where the private Email sector was reluctant to invest. The success of the road haulage operation and the TAZAMA pipeline increased GRZ confidence in its own ability to undertake major commercial projects. Password

(at least 6 characters) The Government‘s own programme was spearheaded by the Industrial Development Corporation (Indeco), a small development finance company Show engaged primarily in long-term lending to the private sector inherited from the Federation. Headed from 1965 1965 by Andrew Sardanis, a Cypriot / Zambian Zambian Send me updates from Scribd businessman, Indeco‘s initial role was to participate in, or set up if necessary, industrial enterprises and to provide incentives for prospective foreign a nd Zambian private private investors.Sign It became ‗the main main channel for applying applying Up government funds to industry by means of loans, share capital and the provision of factory buildings‘ (Martin By registering a Scribd account, you 1972:57). agree to our In addition to Tanzania Zambia Road Services and TAZAMA, between 1965 and 1967 Indeco signed Terms of Service and Privacy Policy contracts for several major projects, most of which were in production by 1970. The largest (K18 million) was for Nitrogen Chemicals of Zambia Zambia (NCZ), Already an account? Sign in a colossal fertiliser planthave which also produced explosives for the mines. Other explosives Ot her major contracts included a fully integrated textile mill, Kafue Textiles (K7 million), Zambia Metal Fabricators (a copper cable plant), a second cement plant, tyres, grain bags and fishing, f ishing, plus two Intercontinental Hotels and several smaller enterprises (Martin 1972:63).

The following observation by Martin is crucial in understanding the reasons for the problems experienced by Zambia‘s industrial parastatals from the midmid1970s. Indeco ‗tended to take the view that if a local industry could be established which did not raise the cost of the product by more than about 30%, the best thing to do was set it up as quickly as possible‘ (Martin 1972:67). In other words, economic viability was not a primary concern; industry was wanted for its own sake, almost regardless of cost10. Many Indeco investments were simply not economically viable.11 While financial viability could be secured through tariff and other protection12 from imports, this was at considerable cost to consumers and to competitiveness; and once protection was removed many Indeco projects were doomed. 10

NCZ‘s costs would have been significantly lower had it used a petro -chemical base instead of expensive local coal (Martin 1972:66). 11  Examples include NCZ, Livingstone Motor Assemblers, Kapiri Glass and Mansa Batteries. 12  Sanctions against Rhodesia (and apartheid South Africa) unintentionally provided substantial protection to domestic businesses until 1979.

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3) Nationalisation With Facebook  Sign ‗Up By 1968 the government became convinced that most foreign-controlled and local expatriate companies, which still made up most m ost of the private sector, Sign Upfast Withand Google were more preoccupied with high returns and with transferring capital abroad than with local reinvestment, diversification of Zambia's economy and or with email Bank 1977:i). In April 1968 President Zambianization of personnel‘ personnel ‘ (World Kaunda announced the ‗Mulungushi Reforms‘, the first in a series of economic Name reforms which, among other things, considerably expanded the role of the state – state – primarily  primarily by taking majority shareholdings in established larger scale private enterprises. Email

In one of the most significant measures 25 leading non-mining companies (mainly department stores, suppliers of building materials, quarries, t ransport companies and breweries) were ‗invited‘ to offer the Government at least least 51% Password (at least 6 characters) of their shares – shares  – while  while continuing to manage them. Indeco was to negotiate the purchase of the shares, with compensation limited to book value, and hold Show them on Government‘s behalf. The President also announced that retail trading outside the main city centres, and certain other businesses (eg smallSend me updates from Scribd scale government building contracts, rural transport contracting and small quarrying), were henceforth to be confined to Zambian citizens. Restrictions were also imposed on local borrowing by non-Zambian non -Zambian businesses and Sign Up remitting dividends overseas. By registering a Scribd account, you agree to our

In essence, the reforms spelled out a Policy policy whereby large scale enterprise Terms of Service and Privacy would henceforth be the reserve of the State while the small enterprise sector would be opened to Zambian citizens by barring the ‗resident expatriates‘ Already have an account? Sign in (mainly ethnic Indian traders) who dominated the sector.13 Following the December 1968 elections a major review of mining legislation, taxation and policy was undertaken. The outcome was announced in the President‘s Matero speech in August August 1969: i. Mineral rights rights would would henceforth henceforth revert revert to the state and and a new system of licences would be introduced ii. The State would have the right to a 51% share in any new  mine  mine iii. Royalties and export tax would be replaced replaced by a single single mineral mineral tax on profits iv. Existing mines were ‗asked‘ to give 51% of their shares to the State (Martin 1972:155-156). Negotiations over the transfer of shares would again be conducted by Indeco, which would pay ‗a fair value represented by book value‘ – to – to be paid out of future dividends. Negotiations with the two groups of mining companies,  Anglo American and Roan Roan Selection Trust (RST), were concluded concluded within two months with agreement agreement in principle on all the main issues. issues. Anglo American‘s assets were valued at just over K240 mill mi llion ion and RST‘s at K165 million; 51% 13

 Macmillan notes that, instead of attracting Zambian entrepreneurs into the commercial ‗vacuum‘ created, the banning banni ng of Indian retailers simply led to the closure of many rural shops and trading networks. As a result, the Mulungushi Reforms Reforms ‗had disastrous results for most Zambians – Zambians – especially those in rural areas‘ (Macmillan 2008:212).

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of these came to K125 million and and K84 million (US$292 million in total). The old shareholders would receive (‗ZIMCO‘ – see – see below) bonds in exchange, Sign Up With Facebook  unconditionally guaranteed by the Government, to be repaid in twelve years from 1970 for Anglo and eight years for RST with an interest rate of 6% Signwere Up With Google management, sales and service (Martin 1972:176). There exclusive agreements with both groups to ensure continuity in management for at least or with email ten years. Name

In November 1970 President Kaunda announced a further round of measures to increase state participation, this time in the financial sector. The measures included: i. 51% Email state participation in the foreign banks14, and the merger of five local commercial banks into two new banks ii. The establishment of a State Insurance Corporation which would take over the business of the existing insurance companies Password (at leasttake-over 6 characters) of the building societies iii. Complete Show

 As the President said, ‗this basically basically completes our economic economic reforms….Now Zambia is ours and more and more wealth is ours too‘ (Martin 1972:240). The Send me updates from Scribd financial sector takeovers differed from the earlier rounds r ounds in that the Government no longer proposed signing management agreements with the former owners to ensure continuity cont Signinuity Up of management; ‗self -management‘ was to be the new policy (Martin 1972:247-8). By registering a Scribd account, you agree to our

In addition to acquiring in the mines, between 1965 and 1975 Terms of majority Service and stakes Privacy Policy the Government established nearly 80 parastatals either through own investment or acquisitions. Of these, 45% were in manufacturing, 30% in retail Already have an account? Sign inand the remaining 25% in transport, / wholesale, finance, and other services, agriculture and energy. In 1973 the Government decided to redeem the ZIMCO bonds in full, despite a penalty of US$55 million, and to terminate the management agreements. It paid $231 million after borrowing $150 million m illion from the Eurodollar market.15 Now it could participate more actively in decision making. In 1974 the first Zambian Managing Directors were appointed at Anglo American and RST.  Alarmed at the change of of policy, foreign shareholders were were unwilling to invest further resources in the mines. This forced the state to inject additional funds; its equity in both mining groups had risen to 61% by 1981. The Government encouraged both groups to rationalise their mining operations and in 1982 they were merged to form one giant conglomerate, Zambia Consolidated Copper Mines (Burdette 1984:47).

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Government, however, failed to reach agreement with Barclays, Standard and Grindlays banks regarding their take-over and instead expanded the operations of the National Commercial Bank. 15  Sardanis suggests that the decision was instigated by Tiny Rowland of Lonhro, who had personal ties with Kaunda, and that Zambia unnecessarily overpaid by over $100 million because the bonds were trading at a substantial discount on international markets (Sardanis 2003:266-278).

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Following the acquisition of the mines, there t here was a reorganisation of the parastatal ‗sector‘. Indeco continued to be responsible for industrial Sign Up With Facebook  parastatals, but as part of the Zambia Industrial and Mining Corporation (ZIMCO) which was set up as the master holding company for all parastatals. Sign Up With Google

While, with the benefit of hindsight, attempts to control so much of the formal or with email economy were surely doomed to failure, it is important to consider how 16 Zambia got Name into this position . Firstly, as noted above, because of of UDI the Government was forced  to  to get involved in certain sectors (fuel, transport, coal). Secondly, public ownership was viewed very differently in the 1960s. Large parts of the UK economy, the former colonial power, had been nationalisedEmail - including coal mining. State ownership was widely seen as a legitimate way for newly independent countries to establish economic independence; many African countries sought an increased role for the state in the economy, through both ownership and planning. The influential Seers Password least 6 characters) Report had (at proposed a major increase in government involvement in the Zambian economy, so as to expand infrastructure, promote agriculture and Show direct more resources into regional development (UN/ECA/FAO 1964). Send me updates from Scribd

Thirdly, and critically, Zambia had the resources to pursue a policy of extensive economic nationalism. The combination of high copper prices and an effective mineral tax regime meant Zambia could afford a level of public Sign Up expenditure in the 1960s that other newly independent countries could only dream of – of – without  without accumulating excessive debt. By registering a Scribd account, you agree to our Terms of Service and Privacy Policy

Finally, the process of extending state ownership was initially well managed by Indeco on behalf of Government. Paying for shares through future Already have an account? Sign inthe fiscal impact. The former owners dividends rather than up front minimised received ‗fair‘ prices and, since they retained 49% of the equity and were encouraged to stay on, still had an incentive to manage effectively. Indeco was acutely conscious conscious of the need for strong management. management. Until the move to ‗self -management‘ -management‘ in 1970, the policy of negotiating management contracts with former owners or (for new projects) international firms meant the change of ownership had relatively little impact on operations. The extension of state ownership began relatively smoothly. Apart from the banks, few of of the firms ‗invited‘ to sell sell their shares refused. refused. Agreement with the mines in 1969 was quick and amicable. With the help of tariff protection, most of Indeco‘s manufacturing projects were financially (if not economically) viable. The manufacturing subsidiaries achieved an after-tax rate of return on net assets of about 7-8% until 1974. ‗From 1970 to 1974 there was an estimated annual net inflow of funds from Indeco to the [Government] budget on current account17…. The greatest part of revenues was from income taxes, followed by interest payments‘ payments‘ (World Bank 1977:35). 1977:35). However, the extension of the state into areas well beyond the core functions of government carried great risks for the economy and public finances. 16

 The political motivation for nationalisation is discussed in Larmer (2010:36).  There was a net outflow on the capital  account  account to finance GRZ investment in Indeco projects (World Bank 1977:36).

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Investing in infrastructure and industrial projects which were not economically viable - and protecting their monopoly with import controls - meant increasing Sign Up With Facebook  the cost structure of the economy at the expense of consumers and competitiveness. And if parastatals incurred incurred losses, for whatever whatever reason, Sign Up With Google GRZ would be under pressure to bail them out in order to continue operations and save jobs. or with email

 Arguably, the greatest risk derived from the nature of Zambia‘s Name industrialisation. Industrialisation was seen as a route to economic independence and reduced dependence dependence on imports. However, a strong exchange rate made imports of capital and intermediate goods relatively Email cheap. Along with an import substitution strategy which provided protection from imported finished goods, this encouraged the development of a highly capital and import intensive industrial sector while discouraging non-traditional exports. Dependence on imports had increased ; instead of finished products, Password least dependent 6 characters) on imports of intermediate Zambia was(atnow i ntermediate goods. Any disruption to foreign exchange supplies would not only affect the supply of finished Show goods but would also jeopardise operations of the new industrial sector. Send me updates from Scribd

Fiscal performance to the mid-1970s With mining revenues averaging 17% of GDP between 1965 and 1970, GRZ was able to dramatically increase Sign Up public expenditure while seemingly following conservative macroeconomic policies. policies. Despite the effects of UDI and despite funding most of the investment programme from domestic By registering a Scribd account, you agree to our resources, the budget buTerms dgetofwas usually in surplus. Gross national savings savings Service and Privacy Policy averaged 37% of GNP over the period while gross domestic investment averaged 28%; about one-third of national savings was provided by Alreadybudget have an account? Sign while in government recurrent surpluses the remainder was contributed by the private and parastatal sectors (World Bank 1977:18). Expansion of the money supply was consistent with the growth of real income and the progressive deepening of the financial system, inflation was low and external debt was minimal (McPherson 2004:30). However, expenditure policies adopted during this period were building up severe fiscal problems for the future. f uture. The substantial social infrastructure programme inevitably gave rise to increased recurrent expenditure commitments; expanded education and health facilities required more teachers and health workers, new roads needed to be maintained, and so on. In addition, the ‗government pursued a policy of very rapid Zambianization and an extraordinary expansion of the entire government personnel establishment. The latter increased at a rate of 18% per annum during 196469. Also, by 1969 most senior posts were staffed by Zambians. During 196474, the civil service increased six-fold and became almost fully Zambianized‘ Zambianized‘ (Gulhati 1989: 29). The fiscal f iscal implications were compounded by a rapid increase in public service wages over the period.18

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The index of average real  earnings  earnings of African workers in the formal sector rose by 33% in 1967 and by a further 15% in the period up to 1973 (Gulhati 1989:10).

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Finally, in an attempt to insulate urban consumers from rises in local production and distribution costs and in import i mport prices, GRZ introduced Sign Up With Facebook  subsidies for such items as maize, fertiliser f ertiliser and fuel during this t his period which subsequently proved difficult to withdraw. Sign Up With Google

Despite increased expenditure, the Government budget was in surplus for or with email three of the five f ive years between 1965/66 and 1970 and was in approximate balance for the Nameperiod as a whole. However, once mineral tax revenue started tailing off from 1971, the fiscal picture changed dramatically; except for 1974, the budget (excluding grants) was in deficit each year for the rest of the century. Government savings savings fell from the equivalent equivalent of 13% of GNP Email (cumulative) between 1965 and 1970 to virtually nil between 1971 and 1975. Public investment bore the brunt of the decline with government savings financing just 15% of government net capital expenditure — compared with 95% during Password 1965/66 -1970 (World Bank 1977:70-72). (at least 6 characters)

While the fiscal deterioration coincided with falling mineral revenues, they Show were not the direct cause. Government revenue actually actually rose slightly slightly from 26.6% of GDP between 1965-70 to 27.6% between 1971-75. Non-mineral Send me updates from Scribd revenue increased from K181 million in 1970 to K431 million in 1976 as a result of increased tax rates and coverage and improved administration – administration – more than offsetting the fall in Up mineral revenue over the period19 (World Bank Sign 1981:82). By registering a Scribd account, you agree to our

The main cause of theoffiscal fService iscal deficits Terms and Privacywas Policynot revenue, but recurrent expenditure, which increased from 18.8% of GDP during 1965/66-1970 to 26.5% during 1971-75 - reaching 35% in i n 1975 (World Bank 1977:78 and Alreadyseveral have an account? Sign in 1981:12). There were causes. Firstly, subsidies increased dramatically. With relatively stable world food prices, subsidy bills remained in the range K20-35 million up to 1972. Following the onset of world inflation and the jump in world food prices, subsidies increased to K82.8 million [US$128 million] – million] – 15%  15% of net recurrent expenditure - in 1975. Secondly, defence expenditure increased in response to heightened tensions with Rhodesia. Thirdly, the recommendations of the Mwanakatwe Commission in 1975 led to a 25% increase in the public service wage bill. Finally, as discussed below, borrowing costs were becoming increasingly significant (World Bank 1981:81). Summary: Independence to mid 1970s Zambia‘s first years of independence coincided with a period of high copper prices. With a tax regime which taxed mining profits heavily, this represented a huge windfall for the new government. government. Much of this windfall was invested invested in physical and social infrastructure and in new manufacturing industries, while some was used to acquire equity in private firms. GRZ appeared to be making good progress towards its industrialisation objective: manufacturing‘s share of 19

Zambia's tax ratio from 1965-75 was 83% greater than the 1969-71 average for 47 less developed countries (15.1% of GNP) covered in an IMF study, and was the highest of any of the countries examined (Chelliah et al 1975).

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GDP increased rapidly from 6% in 1965 to 17% in 1975 (World Bank 1993:14). Sign Up With Facebook

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However, appearances appearances were deceptive. A number of major projects had been Sign UptoWith Google viability, either in response to UDI or undertaken with little regard economic because industrialisation industrialisation was desired for its own sake. Many were simply or with email uneconomic. The fundamental problem was was that at Independence Independence Zambia was a landlocked f our million (mostly very poor) people. Name country of less than four This was a tiny market, yet poor transport links with its neighbours (apart from Rhodesia) meant there was little prospect of reaching the market levels needed to bring costs down and make industrial industrial investments viable. While Email protection from imports meant industries could be financially viable – viable – at  at the expense of consumers - despite high unit costs, with a strong currency and little incentive to seek export markets they could never become competitive. Moreover, much of the industrial sector was capital-intensive (creating few Password (at least 6 characters)  jobs) and import-dependent. import-depende nt. Show

Progress in building social infrastructure was also less impressive than expenditure figures suggest. ‗Schools ‗Schools and hospitals tended to be Send me updates from Scribd overdesigned, leading to high unit costs‘ costs‘ (Gulhati 1989:14). This applied also to the substantial investment in roads20. Sign Up

 As a result, substantial public investment investment21 failed to deliver the anticipated growth. While real GDP growth grow th averaged p.a. between between 1965 and 1974, By registering a Scribd account, you agree to3.9% our wasofonly 0.6% p.a (Table 2). 2). This was due to the low  per capita growthTerms Service and Privacy Policy productivity of much of the investment, as reflected in the increase in the overall (70% public, 30% private sector) incremental capital: output ratio from an account? Sign in (an already high)Already 7:1 inhave 1967-73 to 24:1 in 1973-79 (Gulhati 1989:14). Table 2

Zambian GDP Growth since Independence

Period

Average real GDP growth, %

Average real GDP per capita growth, %

1965 - 1974 1975 - 1991 1992 - 1998 1999 - 2011

3.92 0.67 0.29 5.26

0.62 -2.62 -2.29 2.62

1965 - 2011 2.56 -0.38 Source: World Bank: World Development Indicators 2012

In short, much of the public investment funded from the first f irst copper boom was wasted. Once foreign exchange supplies and mineral revenue dried up Zambia was left with a high cost and fundamentally uncompetitive industrial sector – sector – and  and one largely owned by the state. Meanwhile, the rapid expansion in the public service and in subsidies meant the budget was increasingly exposed in the event of a fall in revenue.

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Zambia had the highest proportion of ‗over -engineered‘ roads (paved roads with less than the 300 vehicles per day threshold needed to make paving economically viable) in a survey of 21 African countries (Gwilliam et al 2008:37). 21  See World Bank (1981:87).

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1975 to 1991

ith buoyant copper revenues  As noted above, with w revenues in the 1960s GRZ was was able to finance most public expenditure – expenditure – capital  capital and recurrent – recurrent – from  from the budget. At Signdebt Up With Google to US$ 277 million, mostly financing end 1969 external public amounted hydroelectric schemes and roads. Service payments on this debt amounted to or with email $ 25.8 million in 1969, just 2.9% of export earnings (World Bank 1981:103). 1981:103). Debt increased Namesharply in 1970 as a result of the government guaranteed ZIMCO bonds (US$ 292 million) to compensate the copper companies for the state's 51% equity stake and a US$ 200 million loan from China for the TAZARA railway. Sign Up With Facebook

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While the fiscal position started deteriorating from fr om 1971, there was no great cause for alarm until 1975 when the economy experienced a number of external shocks. ‗Within the space of several months, Zambia shifted from Password (at least 6 balance having budget  characters) balance of payments surpluses to massive deficits on both and  accounts‘. The 1974 budget surplus of 3.4% of GDP became a deficit of Show 21.5% in 1975, while the balance of payments surplus of 0.5% of GDP turned into a deficit of 29.4% (McPherson 2004:30). Send me updates from Scribd The external shocks comprised: (i) a sharp decline in the copper price (a 51%  drop) which caused a Sign 43%Updecline in export revenues between 1974 and real  drop) 1975; (ii) a major increase in world oil prices in 1974; and (iii) r ising transport costs following the oil price the tosealing of the Rhodesian border in By registering a Scribdshock account,and you agree our 1973. The currentTerms account deficit wasPolicy K439 million, or 85% of exports. This of Service and Privacy was compounded by an ‗internal shock‘ as GRZ total expenditure increased from 30.8% of GDP in 1974 to 50.1% in 1975 (World Bank 1981:12). Already have an account? Sign in

The Government response to the shocks of 1975 was to have a profound, lasting impact on the economy. economy. Faced with such large deficits, deficits, the essential  judgement GRZ had to make make was whether the shocks were likely to be permanent – permanent – in  in which case drastic fiscal f iscal adjustments would be required – required – or  or temporary. If temporary, GRZ could could borrow funds to tide it over until, say, say, copper prices rebounded when it would be able to repay the debts. With the benefit of hindsight, the fateful GRZ judgement (gamble?) that the shocks would prove temporary proved a disastrous misjudgement. However, this was by no means obvious obvious at the time. The copper price had collapsed collapsed in 1970, only to rebound in 1974. 1974. Why should the 1975 price collapse collapse be more permanent? Nobody anticipated anticipated that it would take thirty years for world world copper prices to recover. World Bank forecasts anticipated prices recovering by 1980. 22  As it turned out, copper prices continued continued falling until 2002 (Figure 1). Mineral Mineral revenue, which had financed most public expenditure between Independence and 1974, dried up by 1977. While state mismanagement compounded compounded the mines‘ problems, with falling prices, tax revenues would probably have been little different even if they were still privately owned. The loss of mineral 22

‗the price of copper relative to the prices of Zambia's imports is expected to rise from 78.2

in 1976 to 102.0 in 1980 (a 30% increase)‘ increase) ‘ (World Bank 1977:134).

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revenue created a large hole in public finances. finances. While non-mineral revenue had increased, so had expenditure. Substantial real  cuts  cuts were made in both Sign Up With Facebook  capital and recurrent expenditure between 1975 and 1978. While this succeeded in reducing the deficits, with revenue continuing to decline, it was Signthem Up With Google1989:17). Once introduced, increases not sufficient to eliminate (Gulhati in the wage bill and subsidies proved difficult to reverse, while increased debt or with email meant higher interest payments. As a result, the fiscal deficit averaged 14.5% of GDP between i n the 1980s, 6.0% in the 1990s and Name 1975 and 1979, 13.8% in was not brought under control until 2004 (McPherson 2004: Table 2-1). The economic policies (fiscal, monetary, debt, exchange rate, subsidies, price control, etc)Email GRZ adopted in response to the 1975 shocks failed. As shown below, Zambia experienced one of the steepest declines in income ever seen in peace-time and by the 1980s 1980s was effectively bankrupt. How did this come about? As Password noted, the collapse in copper prices from 1974 1974 led to two key (at least deficits. Firstly, the6 characters) drop in export revenue produced a balance of payments exchange. Secondly, the mines‘ deficit and a reduction in the supply of foreign Show profits fell sharply and mineral tax revenue (based on profits) dried up, resulting in a fiscal deficit . We look first at the balance of payments  deficit. Send me updates from Scribd During the 1960s and 1970s Zambia, like most m ost countries, had a fixed fi xed exchange rate - with the Kwacha Sign Up pegged initially to Sterling and from 1971 to the U.S. Dollar. For as long as copper exports were booming this was not an issue. The appropriate response to to a our persistent balance of payments By registering apolicy Scribd account, you agree deficit in economic theory (and practice) is to allow the currency to Terms of Service andmodern Privacy Policy devalue so as to increase import prices - discouraging imports - and encourage exports. However, as noted above, the import substitution strategy Already have an account? and the strong exchange rate during Sign the inboom years had resulted in an industrial sector which was highly import-dependent. Devaluation would increase the costs of manufactures and imported food and was resisted by both industry and the urban populace. Rather than devalue, therefore, GRZ decided to borrow to cover the deficit. Initially, this presented presented little difficulty. International financial institutions, flush with bank deposits from oil exporters, were keen to lend. The Zambian economy was seen as basically sound and it was anticipated that low copper prices and deficits would be temporary. While interest on the loans added to the fiscal deficit, this appeared the lesser evil. However, as low copper prices and deficits persisted, foreign borrowing became increasingly difficult and availability of foreign exchange became the key constraint to pr oduction. ‗The official exchange rate was devalued on a number of occasions, but every adjustment was was too little and much too late‘ (McPherson 2004:158). Increasingly, GRZ relied on non-market measures to address the foreign exchange shortage: import bans, quantitative restrictions and administrative allocation of foreign exchange by the Bank of Zambia.23 By fixing the official exchange rate and rationing foreign exchange, the policy inevitably led to a 23

 World Bank (1993: Annex A) identifies six different regimes for managing the exchange rate between Independence and 1992, including an auction between 1985 and 1987.

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black market and gave a premium to those fortunate enough to be allocated foreign exchange (mainly parastatals). These arrangements were time Sign Up With Facebook  consuming and contributed to the misallocation of resources. Sign Up With Real imports in 1978 were 57% of Google 1969 levels, leading to serious shortages of inputs and spare parts and to pervasive under-utilization of capacity. By 1978 or withabout email 60%, but some enterprises - unable to capacity utilization averaged obtain foreign exchange for spare parts - were operating at 15% to 25% of Name capacity (World Bank 1981:16, 28).

Turning to the fiscal  deficit  deficit resulting from the simultaneous collapse in copper Email tax revenue and greatly increased expenditure in 1975, GRZ clearly needed to reduce expenditure substantially. Significant cuts were made, but they were never sufficient. Rather than cutting politically sensitive areas such as as public service wages and subsidies, cuts were focused disproportionately on lower Password profile areas(atofleast the6 characters) recurrent budget and on capital outlays (Gulhati 1989:16).  As a result, much of GRZ‘s substantial substantial investment in social social infrastructure in Show the period after Independence had severely deteriorated by the 1990s. For example, a survey of 8,800 km of trunk, main and district roads in 1995 found Send me updates from Scribd that, as a result of the collapse in maintenance funding, only 20% were in ‗good‘ condition and condition and 29% in ‗fair‘ condition while 51% were in ‗poor‘ condition. 90% of feeder roads wereSign in poor Up condition (World Bank 1997: 12). Although primary education expenditure increased by 5% in real terms between 1975 and 1985, this entirely t o salary to The proportion spent on By was registering a Scribddue account, you agreeincreases. to our teaching materials and classroom supplies Terms of Service and Privacy Policy fell from 9.8% in 1975 to 1.7% in 1985. Meanwhile, there was was a 40% increase increase in enrolment over over the period (Kelley 1991:40). Already have an account? Sign in

 Anticipating that copper prices prices would rebound before long, GRZ financed the fiscal deficit through borrowing, both domestic domestic and foreign. Government borrowing from the domestic  banking  banking system contributed to a 258% increase in domestic credit expansion between 1974 and 1978, leading to an increase in the money supply. Along with rising fuel and transport costs, this resulted in a jump in inflation, which reached 20% in 1978 before restrictions on credit expansion were imposed under an IMF Standby Agreement in 1978. GRZ responded by increasing subsidies – subsidies  – which  which peaked at an extraordinary 6.7% of GDP in 1980 (World Bank 1996:5) – 1996:5) – and  and by attempting to control prices. The latter was done both directly, through the Prices and Incomes Commission established in 1981, and indirectly via the pricing policies of government controlled parastatals. Few prices accurately reflected demand or costs of production. Although parastatals sometimes received subsidies to offset the financial losses resulting from price controls, this aggravated the fiscal deficit. With no improvement in copper prices and persistent deficits, foreign debt  accumulated at an astonishing rate. The external debt stock doubled from about US$800 million in 1970 to $1.6 billion in 1975 and doubled again to $3.3 billion in 1980, by which time it exceeded 100% of GDP and was already unsustainable. It continued growing, growing, reaching $7.2 billion in 1990 – 1990 – over  over 200% of GDP (Fernholz 2004:266). 21

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The longer deficits persisted and the more debt accumulated the harder deficit Sign Up With Facebook  control became. ‗The share of interest in total expenditures rose from 5% in 1975 to 15% in 1984 and 31% in 1985. The estimated budget figure for 1986 Sign Up As With Googleexchange became increasingly was 41%‘ 41%‘ (Gulhati 1989:37). foreign scarce, many parastatals got into financial difficulty (see below); government with email guarantees on their loansorwere invoked – further invoked –  further adding to the debt stock – stock – or  or they had to Name be bailed out out from the budget. In addition, unpaid or unsettled unsettled balances guaranteed by creditor and debtor governments or export credit agencies were rescheduled and became public external debt. Inevitably, GRZ fell into arrears on debt debt service. By 1990, arrears alone alone exceeded US$3 Email billion, about the size of GDP (Fernholz 2004:265-6). Parastatals

 As noted above, in 1975 1975 parastatals accounted accounted for over 50% of GDP and Password (at least 6 characters) nearly all industrial production. Indeco‘s manufacturing subsidiaries were financially profitable initially and made a significant net contribution to the Show budget. Yet by the 1990s most parastatals were in such severe financial difficulty that theSend new MMD government embarked on a major privatisation me updates from Scribd programme. In trying to understand what went wrong it is important to distinguish between problems attributable to government ownership and policy and those due to external Sign Upfactors such as copper prices. The first pointByto emphasise is that,you asagree noted above, many of Indeco‘s above, registering a Scribd account, to our investments wereTerms never economically viable. While they could earn financial  of Service and Privacy Policy profits - despite high costs - by exploiting their monopoly, this was dependent on protection from imported competition. Already have an account? Sign in

While Indeco‘s operations were profitable profitable initially, this was in a context of expatriate management, little political interference and plentiful foreign exchange. In his Mulungushi speech speech President Kaunda called called for Indeco to be run at a profit and ‗in a proper commercial and businesslike businesslike way‘, but also to ‗keep the national interest in mind at all times‘ (Tangri 1984:120). The latter became increasingly significant over time. ‗Indeco has only possessed limited autonomy and has been subject to a series of ad hoc  political  political directives on specific specific operational issues….including type and location of investments and pricing decisions‘ (Tangri 1984:121). Management and staffing staffing was a key factor. Conscious of the extreme extreme lack of skilled manpower at Independence, Indeco initially attached great importance to management contracts contracts with expatriate expatriate firms or former owners. owners. However, political impatience with the pace of Zambianisation led to a change of policy. Some management contracts were cancelled (including the copper mines) and pressure was put on parastatals to accelerate appointment of Zambians to managerial and professional positions, with little regard to qualifications and experience. To compound compound matters, ‗managers ‗managers and professionals were not allowed to stick to their posts for a reasonable time; instead they were shunted around from position to position. Consequently, learning on the job was undermined and the attitude of ―milking the company" was widespread‘. widespread‘. Finally, overstaffing became a conspicuous feature of parastatals; between 22

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1975-80 jobs increased twice as fast as production in the public sector while private firms shed workers more rapidly than their output fell (Gulhati Sign Up With Facebook  1989:23). Sign Up With Google Establishing a viable manufacturing sector in such conditions would have been difficult whatever the external environment. However, falling copper with email prices provided the the killerorblow. As noted, the combination of a strong strong currency and import substitution had resulted in an industrial sector which was Name highly import-dependent. Once the balance of payments turned into deficit, even though they received preferential treatment, parastatals had increasing difficulty accessing foreign exchange. This disrupted operations and lead inevitably toEmail lower capacity utilisation and higher unit costs.

To compound matters, parastatals were increasingly subject to price controls on their outputs as government sought to suppress inflation. Although they Password (at least 6 characters) received subsidies to compensate, these rarely covered the full loss. Not surprisingly, therefore, Indeco‘s return (before depreciation) on net assets Show declined from 12% in 1969/70-1971/72 to sizeable losses by the end of the t he 1970s (Gulhati 1989:23). Indeco‘s auditors qualified their annual accounts Send me updates from Scribd each year between 1980 and 1986, noting that their preparation on a going concern basis was dependent upon continued support from ZIMCO – ZIMCO – ie  ie subsidies from the mines or GRZ. Sign Up The 1987 Annual Report noted that ‗the profit margins earned still remain inadequate to meet the group's debt servicing obligations, and working capital By registeringasset a Scribdreplacement account, you agreeexpenditure to our requirements‘ (Craig Terms1999:78). of Service and Privacy Policy The poor performance of the parastatal sector was widely recognised - from Already an account? the President down. Ashave early as 1977Sign thein Report of a Special Parliamentary Select Committee noted that: ‗Government annually makes a large a large allocation of capital funds to support projects undertaken by parastatal organisations. This has arisen largely because these bodies are not able to generate their own capital for plant renewal r enewal and new investment.... Poor management, absence of inventory control, overstaffing, inadequate pricing of products and political interference have been named as some of the reasons for the poor performance of the parastatal sector ‘ (Craig 1999:79). Increasingly GRZ was forced to bail out parastatal losses, estimated at US$455 million between 1985 and 1989 (World Bank 2002:5), crowding out expenditure on basic public services. As losses accumulated the very survival  of parastatals – parastatals – even  even the viable ones – ones – was  was in jeopardy. Reforms24

With debt continuing to mount despite significant reductions in expenditure, and no sign of a recovery in copper prices, it became increasingly clear to the government that its economic strategy was not working. However, an IMF programme agreed in 1981 was suspended after a year b ecause of disagreement over reforms proposed for 1982. GRZ attempted to put off reform by borrowing. When private sources of credit dried up in 1982, it could 24

 This section draws heavily on Bonnick (1997: 49-53).

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postpone reform no longer. In return for IMF and World Bank support in 1983 GRZ made its first attempt at reform: it devalued the Kwacha by 20%, raised Sign Up With Facebook  interest rates, relaxed price controls, gave exporters preferential access to half their foreign exchange earnings, increased the price of maize meal by Sign Up With Google a 4% Mineral Export Tax. 30% and fertiliser by 70%, and introduced with email Soon after, in an effort toorforce a rescheduling of its debt, GRZ unilaterally suspended payment of its foreign debt - causing the World Bank to suspend Name disbursements. Following elections in October 1983, in which President Kaunda was re-elected, negotiations reopened with the IMF, World Bank and other donors with a view to reviving the reform programme. This resulted in further priceEmail liberalisation, subsidy reduction, and interest and exchange rate reform. Fiscal policy was was also tightened and and the fiscal deficit deficit cut from 16% in 1982 to 10% in 1984. However, in the face of industrial unrest, in 1985 GRZ relaxed some of the financial policies – policies – aggravating  aggravating the fiscal and external Password (at least 6 characters) deficits. Show

 Another IMF / World Bank backed backed reform programme, launched launched in late 1985, scrapped the import licensing and foreign exchange allocation arrangements Send me updates from Scribd and introduced a foreign exchange auction system. This produced a devaluation of the Kwacha from K2.2 to K5.15 to the US Dollar at the f irst auction. Following a periodSign of relative stability, things deteriorated sharply in Up late 1986. Falling copper exports and a failure f ailure to contain an increase in the money supply to a asharp devaluation devaluation the exchange rate. Concerned By led registering Scribd account, you agreein to our that this was fuelling GRZ tried to intervene in the auction to limit the Termsinflation, of Service and Privacy Policy devaluation. However, this only succeeded succeeded in undermining confidence confidence in the auction and the Kwacha fell to K19 to the Dollar by the end of the year. While Already have an account? Sign in the programme helped non-traditional exports expand rapidly, growth was negligible, inflation shot up and when food f ood subsidies were reduced there were food riots in December 1986. In May 1987, with the Kwacha at K21 to the Dollar and rising social unrest, President Kaunda announced that the government was abandoning the auction and the IMF / World Bank reform programme and would pursue its own adjustment programme, the New Economic Recovery Plan. The new programme fixed the Kwacha at K8 to t o the Dollar, introduced int roduced extensive extensive price controls and import import restrictions, and limited debt service payments. payments. The main priority was increasing output, even if this meant increasing the money supply and inflation. While GDP growth improved in 1987 and 1988, this was largely due to good rains (and maize harvests) and a short lived rise in copper prices. Inflation was exacerbated by the growing fiscal deficit and lax monetary controls and the underlying problems continued25. In 1988 the auction was reintroduced to allocate foreign exchange, but not to fix the rate. Then the Kwacha was devalued by 25%, some import restrictions were removed again, and monetary reserve reserve requirements and interest interest rates were raised. raised. In June 1989 1989 25

 Inflation increased from 44% between 1985 and 1987 to 128% in 1989, and averaged over 90% between 1990 and 1991 (World Bank 1996:13).

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GRZ decontrolled all consumer goods prices apart from f rom maize. With other measures, this pavedSign the Up way for a new agreement with the IMF and World With Facebook  Bank. However, (unsuccessful) (unsuccessful) attempts to engineer a pre-election boom in the period leading up to the October 1991 elections through increased public Sign Up With service wages, expansionary fiscalGoogle measures and increased maize and other subsidies resulted in the programme being abandoned yet again. or with email

Summary: 1975 Name to 1991 The Kaunda / UNIP administration presided over one of the steepest ever economic declines in peace time. With GDP contracting by an average of 2.6% per capita per annum between 1975 and 1991 (Table 2), Zambia went from middleEmail income to least developed country status. With the highest level of public debt per capita in the world, it was effectively bankrupt. The manufacturing capacity built up at great expense during the postIndependence boom was heavily dependent on imports and foreign Password (at least 6no characters) exchange. While one predicted how long copper prices would take to recover the fundamental problem was that, by becoming deeply involved in Show economic production, the state had bitten off more m ore than it could chew. Send me updates from Scribd

Once mining revenue and foreign exchange dried up, GRZ was unable to adjust expenditure sufficiently. Huge expenditure on debt service, bailing out parastatals and subsidies Sign for urban consumers meant large fiscal deficits and Up the collapse of funding for basic social social services services and investment. investment. Although data is not available, failure of you UNIP‘s (and agriculture) policies By registeringthe a Scribd account, agree toeconomic our resulted in a sharp increase in Privacy poverty - directly through falling incomes and Terms of Service and Policy indirectly through the collapse of public services. VI.

Already have an account? Sign in 1991 to 2011: MMD

The 1991 elections ended the UNIP era and brought to power the Movement for Multiparty Democracy (MMD) with a strong mandate for reform. With inflation exceeding 100% and GDP declining, in February 1992 President Chiluba‘s government agreed a comprehensive reform programme with the IMF and World Bank aimed at stabilising and restructuring the economy and at stimulating growth (World Bank 2004:7). The main reforms are summarised below. Fiscal policy . Progress towards stabilisation was undermined initially by a

prolonged drought in 1992, continued falls in copper revenues and high pre election wage settlements, which exacerbated both the fiscal deficit and inflation. In 1993 the government introduced a cash budget system to strengthen budgetary control expenditure. In 1994 the Zambia Revenue  Authority was established to to strengthen revenue collection collection and in 1995 Value  Added Tax replaced replaced the cumbersome sales tax. tax. With the abolition of most consumer and producer subsidies and with increasing aid, the fiscal deficit after grants started to come down from 1995 – 1995 – averaging  averaging 4.9% of GDP between 1995 and 2000 (McPherson 2004: Table 2-1).

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Monetary policy . In 1993 the Bank of Zambia removed all restrictions on bank

lending and deposit rates and allowed official interest rates to be determined Sign Up With Facebook  by the market at the weekly Treasury Bill auction. Sign UpGovernment With Google allowed the exchange rate and the the Exchange Rate. In 1992

allocation of foreign exchange to be determined by the t he market through or with email bureaux de change . By 1993 most foreign exchange controls had been removed and by 1994, when the Kwacha became fully convertible, the foreign Name exchange market was completely decontrolled.  Agricultural liberalisation. Subsidies of mealie meal and fertilisers were

eliminated inEmail 1992. In 1993 GRZ decontrolled decontrolled maize producer prices and withdrew from marketing agricultural inputs.

Trade liberalisation Password. GRZ embarked on a radical programme of trade and

(at least 6 characters) industrial policy reform in 1992, eliminating elimi nating all licensing and quantitative restrictions on imports and exports over aShow five year period. Tariffs were reduced and the tariff structure simplified. The effect of these reforms was to transform Zambia‘s trade regime from one of the most protectionist in Africa to Send me updates from Scribd  – apart  – apart from fuel and maize - one of the most liberal. This has been consolidated over time with further tariffs t ariffs reductions under regional trade agreements. Sign Up

It meant the abandonment ofaccount, the import substitution policy that had been in By registering a Scribd you agree to our place since Independence. Following mounting problems with foreign Terms of Service and Privacy Policy exchange access, price controls and political interference during the 1980s, this was a disaster for many many of Indeco‘s Indeco‘s industrial parastatals. Some had Already have an account? in never been economically viable and Sign depended on protection from imports for survival. Dismantling tariff protection and the removal of producer subsidies was the final nail in the coffin. Privatisation. The MMD election manifesto contained a strong commitment to

privatisation, recognising the need both to stem the fiscal haemorrhage from loss making parastatals and to attract investment to enable potentially profitable companies to survive. A survive. A privatisation act was passed passed in 1992, and the Zambian Privatisation Agency (ZPA) was created to convert parastatals to private ownership. In many respects ZPA was highly successful. By March 2000, 113 enterprises out of the original portfolio of 144 had been privatised (Table 3). Although 38 parastatals had been forced into liquidation before the privatisation programme began (World Bank 2002: Annex 1), the vast majority survived  –  – one of the primary objectives of the programme. While employment in nonmining parastatals fell from about 28,000 before privatisation to an estimated 20,000 four years later, this was inevitable; most parastatals had bloated staffing levels and significant reductions were necessary for f or competitiveness and to stay in business (World Bank 2002:19). Meanwhile, t he need to be able to trade shares led to the establishment of the Lusaka Stock Exchange as part of the programme.

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Despite resistance to the dismantling of its portfolio by ZIMCO (which GRZ resolved by liquidating ZIMCO in 1995), a World W orld Bank study concluded that Sign Up With Facebook  Zambia‘s privatisation programme up to 1996 (before privatisation of the mines) was the ‗most successful‘ in Africa Afr ica - with many examples of ‗best Sign Up Withby Google practice‘ that should should be followed other countries. In particular, ZPA was was ‗exemplary for the attention it has paid to ensuring public accountability and with email transparency‘ transparency‘ (CampbellorWhite and Bhatia 1998:64). Name

Privatisation of ZCCM was a different story. The conglomerate was to be broken up and sold in separate packages, with the state retaining responsibility for pension and environmental obligations. Contrary to Email legislation, the process was led not by ZPA but by former managers of ZCCM opposed to privatisation – privatisation – overseen  overseen by a committee of ministers. Political interference (particularly over Luanshya mine) contributed to delays and increased financial Password losses. Pressure from the IMF, World Bank and others (at least 6 characters) resulted in the eventual sale of packages ‗one by one through often opaque sale bilateral negotiations with preselected preferred bidders‘ (Adam and Simpasa bidders‘ (Adam Show 26 2010:66).  However, with copper prices approaching their lowest real level in a century (Figure 1), GRZ was in a weak negotiating position and was forced Send me updates from Scribd to offer generous tax and other concessions to close deals. Table 3

Extent of Privatisation, 1992 to March 2000

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Size of State Number in original Number Privatised Enterprise Portfolio By registering a Scribd account, you agree to our

Size unclassified Large Medium Small

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27 19 27 24 81 Already have an account? Sign 69 in

TOTAL 144 Source: Craig (2000:358)

113

Number Remaining in State Ownership

8 8 3 12 31

While no systematic ex post  evaluation  evaluation has been carried out of the privatisation programme, it was a landmark in the transformation of the Zambian economy. This is most clearly seen in mining m ining where, despite a murky privatisation process, substantial foreign investment inflows triggered a rebound in copper production (and GDP growth) - well before copper prices started to recover (Figure 1). This was repeated across much of the former ZIMCO empire, with new investment leading to rapid growth in such diverse areas as sugar, cotton, cement, dairy, livestock, maize milling, breweries, electricity transmission, trucking, construction and hotels. 27  Along with enabling the survival survival of most former parastatals, the main impact impact of privatisation was to relieve GRZ of responsibility for bailing out parastatal losses - facilitating both the restoration of fiscal discipline (see below) and increased expenditure on public services. 26

 See Adam and Simpasa (2010:65-68) for details of the mining privatisation process. It is revealing to examine the performance of those parastatals that were not privatised, such as ZESCO, Zamtel, Zambia Railways, TAZARA, TAZAMA and Indeni. Each faced serious operational (eg load shedding, unplanned closures) and / or financial problems during the 2000s. 27

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Despite the above evidence, many Zambians remain ambivalent about Sign Up With Facebook  privatisation. Craig (2000:361) noted as early as 2000 the striking contrast between the positive view of the international community and that held by Signthe Up With Google process was ‗deeply flawed‘ - with Zambian civil society that privatisation allegations of looting by ministers. While few f ew specific allegations have been or with email made - none have come to court - privatisation was still a sensitive topic during the 2011 Nameelection campaign. This is partly explained by the secrecy over the mining Development  Agreements and low mining tax despite booming copper copper prices. There is also Email resentment that few of the privatised assets were acquired by Zambians (World Bank 2002:26). Also while the losers from privatisation – privatisation – those  those who lost their jobs - were highly visible, the winners were dispersed and largely unaware that they were benefiting. There is little public awareness of the Password (at least 6 characters)losses were to blame for the collapse in public extent to which parastatal services from the 1980s - or that in manyShow cases the only alternative to privatisation was liquidation. Send me updates from Scribd

Economic Recovery and Return to Growth

It took some time for the above reforms to have an impact and GDP per Sign Up privatisation capita continued falling until 1998 (Table 2). However, following privatisation of the mines By - aregistering turninga Scribd pointaccount, in Zambian history  and new investment, the you agreehistory – to our  – and rebound in copper production (Figure 1) produced a return to growth. This Terms of Service and Privacy Policy was reinforced from 2003 by the rapid rebound in copper prices, which encouraged further investment. investment. As a result, both both the mining industry industry and the Already have an account? Sign in cycle of growth (mirroring the economy generally have seen a ‗virtuous‘ previous ‗vicious‘ cycle of decline). Zambia has experienced an unprecedented period of sustained real GDP growth, which has continued to the present - averaging 5.2% p.a., or 2.6% in per capita terms, between 1999 and 2011 (Table 2). Booming copper exports quickly eliminated the balance of payments deficit (from -13% of GDP in 2003 to a surplus of 8.3% in 2006) and facilitated the replenishment of foreign exchange reserves. They also contributed, together with a number of other factors, to a dramatic turnaround in public finances from 2004. One important contributor was was the Heavily Indebted Indebted Poor Country (HIPC) debt relief scheme. When Zambia joined j oined the HIPC scheme in 2000 (termed ‗Decision Point‘) it started receiving ‗interim‘ relief on its foreign debt.  As a result, foreign interest due fell from 5% of GDP in 1998 1998 (Hill 2004:85) to 1.3% in 2002. This gave GRZ a strong motive to finally bring the fiscal deficit down to sustainable sustainable levels in order to reach HIPC ‗Completion Point‘. As a result of the combined effect of lower foreign interest, expenditure cuts and GDP growth (which increased the denominator), in 2004 the fiscal deficit (NB after grants) was halved to 2.9% of GDP – GDP – much  much the lowest level in 30 years. It was sustained at a similar level through 2012. The establishment of fiscal discipline helped Zambia reach HIPC Completion Point in 2005. Interim debt relief became became irrevocable and total external debt debt 28

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was cut from US$ 6.2 billion in 2005 (86% of GDP) to a modest US$ 962 million (9%) by 2006. In per capita terms, Zambia received more debt relief Up With Facebook  Sign than any other other HIPC country, transforming the country‘s balance sheet overnight. Foreign interest interest fell to an insignificant insignificant 0.1% of GDP by 2007 Sign Up With Google (Whitworth 2013). or with email reduced GRZ‘s need for domestic  finance, The drop in the fiscal deficit greatly  finance, leading to a Name drop in interest rates and inflation. The combination of lower domestic borrowing and interest rates meant a fall in the domestic interest bill from 2.9% of GDP in 2004 to 1.8% in 2006 (and 1.1% in 2011), reducing expenditure (and the deficit) still further. It also encouraged private investment investment Email by reducing government crowding out of the private sector from domestic financial markets; in 2007 credit to the private sector exceeded public borrowing for the first time in decades (Whitworth 2013). Password

(at balance least 6 characters) With both the of payments and the fiscal balance under control, negligible foreign debt, healthy foreign exchange reserves and (from 2009) Show inflation in single figures, by the t he late 2000s macroeconomic stability had finally been established - after three decades. The improvement in the macro Send me updates from Scribd economy was underlined by the issue of Zambia‘s first ever sovereign credit ratings in 2011 by Fitch and Standard & Poors Poors (both B+). At last, with a booming mining sector and   macro  macro Sign Up stability, Zambia had a solid platform for investment and growth and the prospect of rebuilding public infrastructure and services. By registering a Scribd account, you agree to our Terms of Service and Privacy Policy

The pace of rebuilding was dependent on the level of resources at GRZ‘s disposal. Whereas the first copper boom financed much of Zambia‘s public an account? Sign in generated by the second boom was infrastructure, theAlready level have of fiscal resources much smaller – smaller – at  at least initially. Mineral tax revenues resumed in 2005, but were still only equivalent to 1.9% of GDP in 2010. Moreover, the increase was offset by a drop in non-mineral revenue over the same period. Despite flat tax revenue, ‗fiscal space‘ increased significantly due to lower expenditure – mainly on interest. As a result of debt relief and fiscal fi scal discipline the combined domestic and foreign interest bill fell from 4.1% of GDP in 2002 to 1. 2% in 2011, releasing resources for more productive use. Given that GDP grew by some 75% over the period, and with mineral tax revenue reaching 3.8% of GDP in 201228, from about 2007 GRZ had increasingly significant ‗discretionary‘ resources at its disposal (Whitworth 2013).  Another effect of economic recovery recovery was a substantial reduction reduction in Zambia‘s ‗autonomous‘ during the first first aid dependence . Having been financially ‗autonomous‘ decade after Independence, GRZ signed numerous financing agreements with international financial institutions and bilateral donors from the late 1970s in order to plug pl ug growing fiscal and balance of payments gaps. However, most aid was suspended when the government abandoned its IMF programme in 1987. Following the change change of government government and the MMD‘s MMD‘s commitment to a new IMF programme, donor support rose to unprecedented levels, averaging 28

Mining revenue was 5.5% of GDP in 2011 due to the ‗one off‘ payment of arrears of windfall tax, which was introduced in 2008 but dropped the following year.

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about US$ 950 million pa between 1990 and 1994. Zambia became one of the most highly aid dependent countries in Africa. However, the same factors Sign Up With Facebook  in the previous paragraph that explain the growth in discretionary resources also led to a steady reduction reduction in Zambia‘s aid dependence. dependence. In 2002 total net Sign Up With Googleof GDP and 97.6% of total domestic aid to Zambia was equivalent to 21.9% public expenditure. Although aid was fairly flat in nominal US Dollar terms, with5.4% email and 23.3% respectively by 2011 these ratios had fallen toorjust (Whitworth 2013). Name Before examining how GRZ chose to spend its new resources, the novelty of this situation should be emphasised. GRZ was emerging from a three decade Email long fiscal crisis during which virtually all resources were devoted to wages, debt service, subsidies (until the 1990s) and bailing out parastatals. There were simply no discretionary resources left over for f or public investment or anything else. What little investment had taken place was funded by donors. Password (at least 6 characters) So when, after a gap of 30 years, GRZ found itself with resources of its own to spend there was no system or technical capacity left in the Finance Ministry to Show allocate resources between competing uses and investments. In their absence, expenditure decisions were largely politically driven. Send me updates from Scribd  Analysis of fiscal performance performance during the final years of the MMD government government shows that discretionary resources Sign Up were largely allocated to three uses: 1. The Farmer Input Support Support Programme (FISP, mainly fertiliser subsidies), expenditure on which increased by 0.5% of GDP (to 1.0%) By registering a Scribd account, you agree to our between 2005 2011; Terms and of Service and Privacy Policy 2. Food Reserve Reserve Agency (FRA) purchases of maize at above market market prices, which increased by 1.6% of GDP (to 1.8%) over the period; and Already have an account? 3. Paving roads, which increased increas edSign byin1.5% of GDP (to 1.6%). Between them they accounted for 3.6% out of an estimated 4.4% of GDP increase in discretionary resources between 2005 and 2011 (Whitworth 2013). The principal rationale for the HIPC initiative was that debt relief would release resources being used unproductively for debt service in poor countries (ie create ‗fiscal space‘ space‘) and allow them to be used instead for poverty reducing public expenditure. However, the three main uses to which the MMD government allocated increased resources appear to have been of little benefit to the poor. FISP, which has faced numerous operating problems, has been largely captured by a minority of larger, wealthier farmers while crowding private traders out of the market (Sitko et al 2012). Meanwhile, ‗the benefits of the FRA maize support prices are disproportionately enjoyed by the relatively large farmers over 5 hectares, even though they constitute only 3.8% of the smallholder farm population‘, while population‘, while most Zambians who are net maize purchasers lose through paying higher prices (Jayne et al 2011). Despite Zambia‘s Zambia‘s large  large backlog of road maintenance, most additional GRZ road funding since 2009 has been used to upgrade a small proportion of roads to fully engineered engineered paved standard. As discussed below, few of these projects have sufficient traffic potential to be economically viable.

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Overview of MMD Economic Management, 1991 - 2011

 can be considered one of the most radical and The MMD government successful economic economic reformers Africa has seen. The major reforms of the Sign Up With Google Chiluba period – period – privatisation,  privatisation, trade and financial sector liberalisation, abolition of most subsidies and price controls – controls – caused  caused considerable pain or with email initially. However, boosted by the copper boom boom from 2003, they laid the groundworkName for the establishment of fiscal discipline and macro -economic stability from the mid-2000s and the longest unbroken period of growth in Zambia‘s history. By the 2011 elections the macro economy had never been in better shape. Sign Up With Facebook

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Some qualifications to this glowing assessment are in order. Firstly, most of the reforms consisted essentially of just reversing misguided policies from the UNIP era – era – which  which had clearly clearly failed. Secondly, there was was little alternative. Password leasteffectively 6 characters) bankrupt and dependent on support from donors The country(at was and the IMF - who insisted on reform; theShow delay in privatising the mines suggests support for reform was less than whole hearted. Thirdly, economic performance was greatly boosted by external factors such as the copper price Send me updates from Scribd recovery and debt relief. Fourthly, while macro-economic performance was transformed, the micro / sector record was much less impressive - with increased fiscal space being dissipated on political projects and no Signlargely Up progress in agriculture. Finally, the MMD era is associated with increased levels of corruption – corruption  – particularly  particularly under Presidents Chiluba and Banda. By registering a Scribd account, you agree to our Terms of Service and Privacy Policy

Improved economic performance was accompanied initially by a significant reduction in poverty. poverty. Systematic poverty measurement began in 1996 with with Already haveMonitoring an account? Sign in ey (LCMS). The Poverty Trends the first Living Conditions Surv Survey Report 2010 shows that the poverty headcount ratio fell from 68.1% in 1996 to 59.3% in 2006 while extreme poverty declined from 44.5% to 36.5% over the same period. Most of the reduction took place between 1998 and 2004 – 2004 – and  and in urban areas; whereas urban poverty fell from 40.5% in 1996 to 26.7% in 2006, rural poverty only fell from 84.2% to 76.8% (Republic of Zambia 2010: iii). Despite continuing growth, there was negligible further reduction in poverty between the 2006 and 2010 LCMS‘. ‗Since ‗Since 2006, changes in the rural, urban and national poverty rates have all been statistically insignificant‘ insignificant‘ (World Bank 2012:1). Despite falling poverty until 2004 Zambia‘s highly unequal income distribution deteriorated further, with the Gini coefficient increasing from 47.4% in 1996 to 52.6% in 2006 (Republic of Zambia 2010:iv). The T he slowdown in poverty reduction, increasing inequality, lack of employment opportunities and the public perception that corruption was increasing all contributed to the MMD being voted out of office in 2011.

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2011 to 2013: Patriotic Front

 The essential economic challenge facing the Patriotic Front (PF) administration was to ensure that macro-economic stability and rapid growth Signjust Up With Google benefited the entire – entire – not  not the urban – urban  – population,  population, through employment creation and improved service delivery. The combination of macro stability or mining with emailmeant that robust GDP growth was likely to and healthy investment in continue. While Nameexperience showed that growth per se has little direct impact on jobs and poverty, mineral tax revenues were becoming increasingly significant29 and fiscal space was growing rapidly – rapidly – representing  representing a real opportunity for the new government to increase services to the poor. Sign Up With Facebook

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Moreover, the fiscal transformation meant public expenditure was no longer limited by tax revenue. Following debt relief r elief GRZ had an unusually healthy balance sheet and, with a good long term outlook for copper, was in a strong Password (at least 6 characters) position to resume commercial borrowing. With conventional aid flows f lat, the MMD government had started borrowing Show from new semi-concessional sources such as China and the Development Bank of Southern Africa. Following the issue of Zambia‘s first sovereign credit ratings, and with the the completion of its Send me updates from Scribd IMF programme (which restricted commercial borrowing) in 2011, a completely new opportunity presented itself – itself – issuing  issuing sovereign bonds. With bond yields in developed economies at historic lows, Zambia was able to take Sign Up advantage of increased interest in emerging markets to issue its first Eurobond – Eurobond – for  for US$ 750 million - inyou September By registering a Scribd account, agree to our 2012. Despite a low yield of 5.625%, the issueTerms wasof fourteen timesPolicy oversubscribed – a oversubscribed –  a striking indication Service and Privacy both of the transformation in Zambia‘s reputation in financial in financial markets and the scale of its borrowing capacity. Already have an account? Sign in

How effectively has the new government used the resources r esources resulting from macro stability and the second copper boom in pursuit of poverty reduction and jobs creation? Has it learnt from the mistakes of previous administrations? While it is too early to assess results, there are disturbing signs that history is repeating itself. We look first at economic economic policy measures and then at public expenditure.  An inescapable conclusion conclusion from the above examination examination of Zambian history is that government ownership and management of the means of production has impoverished the country. Early actions of the PF government suggest this is not well understood. Its first major policy reform was to cancel the 2010 privatisation of Zamtel on the grounds of alleged corruption. While the initial valuation lacked transparency, sale proceeds of US$ 257 million exceeded those of all the other privatisations combined - and further foreign investment had contributed to a marked turnaround in performance. Zambia became the first country to renationalise a telecoms utility30. This was followed by the unilateral cancellation in 2012 of a 20 year concession (signed with a South  African firm in 2003) to operate Zambia Railways. Railways. In 2013 GRZ announced announced that it was considering establishing a publicly owned airline, despite the 29

 Mineral tax revenues were equivalent to 3.8% of GDP in 2012, following the doubling of royalties on copper and cobalt to 6% of gross sales value. 30  The case is being contested in court.

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financial collapse of all three previous (one public, two private) Zambian national flag carriers and growing competition from foreign airlines. Sign Up With Facebook

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There have been signs of a return to Kaunda era interventionism under the Sign Upthrough With Google PF government, particularly the Bank of Zambia. In 2012 the Bank both increased minimum capital requirements for commercial banks - to or with email encourage them to increase domestic lending - and prohibited the use of foreign currencies Name in domestic transactions. In 2013 it imposed interest rate caps on bank and other loans - intended to help small enterprises borrow more cheaply -and introduced tighter controls on foreign exchange transactions. Many of theEmail new government‘s economic policy measures can be characterised as populist, aimed particularly at the urban population. Despite their failure in the 1970s and 1980s, there was a revival of subsidies and price controls. The two large agriculture subsidy programmes inherited f rom MMD, Password (at least 6 characters) FISP and FRA maize purchase, were both retained r etained despite unambiguous evidence of their ineffectiveness. The dismissal of the Energy Regulation Show Board after the election and the failure to appoint a new Board until 2013 meant that energy tariffs were effectively frozen – frozen – since  since Board approval was Send me updates from Scribd required for increases. increases. Electricity tariffs – tariffs – already  already among the lowest in Africa and well below cost recovery level - fell further in real terms (Whitworth 2014). Meanwhile, with rising world oilUp prices, unbudgeted fuel subsidies jumped to Sign US$145 million (0.7% of GDP) in 2012 and US$ 220 million (1%) in 2013 before fiscal By pressure their abandonment in May 2013. Both energy registering forced a Scribd account, you agree to our subsidies benefitTerms primarily theandrelatively wealthy, urban population. of Service Privacy Policy PF wages policies also appear eerily familiar. Firstly, in 2012 the minimum m inimum wage was increased, increase d, doubling in theSign case of domestic workers. While this Already have an account? in of benefits those poorer workers who retain their jobs, international experience suggests it is likely to be at the expense of fewer jobs in total. GRZ then agreed a wage deal which increased the public service wage bill by an extraordinary 45% (37% in real terms) from September 2013. Having been close to 8% of GDP throughout the previous decade, the wage bill was projected at over 11% of GDP (60% of revenue) in 2014. Again, the beneficiaries are largely urban. Expenditure on transport infrastructure was also to increase. US$ 120 million of the Eurobond proceeds was earmarked for Zambia Railways31. However, this figure was dwarfed when President Sata launched the Accelerated National Roads Construction (‗Link 8000‘) Programme to upgrade 37 roads (8,200 km) to bitumen standard at an estimated cost of ZKw28 trillion (US$5.3 billion) over five years (http://www.postzambia.com/postread_article.php?articleId=28959)). Following the increase in expenditure on read_article.php?articleId=28959 paving roads from 0.1% of GDP to 1.6% between 2005 and 2011, PF road plans imply further increases to 3-4% of GDP annually. Yet few of the road projects have been been subject to economic economic appraisal. If they were most would almost certainly be non-viable. non -viable. As shown elsewhere, 31

 As noted above, there are serious doubts whether Zambia needs two railway systems.

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Zambia already has more paved roads than are justified by traffic volumes. Except for some urban roads, the cost of upgrading remaining unpaved roads Sign Up With Facebook  to paved standard – standard – instead  instead of maintaining them properly – properly – exceeds  exceeds the economic benefits, benefits, given low traffic traffic potential. Paving roads is of little benefit With Google and maintenance of the unpaved to the poor and crowdsSign outUp rehabilitation network – network – activities  activities with much better economics and benefits for the poor or with email (Raballand and Whitworth 2014). Name

VIII.

Conclusions

Zambia‘s post-Independenc post-Independence e copper boom boom was a mixed mixed blessing. While the Email revenue windfall financed substantial investment in social infrastructure, it also encouraged GRZ to take on a much larger role in economic production than it could handle and to incur expenditure that could not be afforded once the boom ended. Failure to adjust expenditure to falling mining revenue set off Password least 6 of characters) a downward(atspiral fiscal deficits, inflation and borrowing - effectively bankrupting the state. Meanwhile, attempts to industrialise industrial ise through import Show substitution only succeeded in turning Zambia into a high cost, import dependent economy. Once foreign exchange dried up parastatal losses Send me updates from Scribd accumulated – accumulated – compounding fiscal problems and threatening firms‘ survival. The inevitable outcome, aggravated by the failure of agriculture policy, was a collapse in production andSign in funding for basic public services – services – and  and increased Up poverty. By registering a Scribd account, you agree to our

The reversal of many UNIP by MMD succeeded in steadying the ship. Terms of Servicepolicies and Privacy Policy Privatisation of the mines was a landmark, leading to the longest period of growth in Zambian history – history – greatly  greatly assisted by the second copper boom. Already have an account? in of parastatal bailouts, the abolition Together with trade liberalisation, theSign end of most subsidies and debt relief this helped restore fiscal and macroeconomic stability. With growing mineral revenue, this led to the creation of meaningful fiscal space for the first time in 30 years - and the opportunity to make real inroads into poverty. However, while expenditure on basic services increased significantly from the early-2000s, much of the t he fiscal space was wasted on political projects and poverty reduction was largely confined to urban areas. With no administration capable of implementing effective agriculture policies, the gap between urban and rural areas continued to widen. While it is too soon to draw definite conclusions, there are worrying signs that the PF administration has failed to learn from history and is repeating mistakes from the first copper boom. Re-nationalisations and increased interventionism indicate greater faith in the capacity of the state to manage the economy than the track record supports. Meanwhile, commitments in 2013 on wages and roads alone could easily add 5% of GDP to public expenditure – expenditure – more  more than total revenue from mining. When other measures such as the creation of 29 new districts, moving the headquarters of Southern Province and rebasing the Kwacha are taken into account, expenditure looks set to increase i ncrease substantially – substantially – for  for little economic return. With little prospect of mining revenue increasing much above its 2012 level of 3.8% of GDP,

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Zambia appears in danger of a return to unsustainable fiscal deficits and heavy borrowing – borrowing – with  with the poor losing out once again. Sign Up With Facebook

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References

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Campbell White, Oliver and Bhatia, Anita (1998), ‗Privatisation in Africa‘, Directions in Development, Washington DC: The World Bank. Send me updates from Scribd Chelliah, R.J., Baas, H.J. and Kelly, M.R. (1975), ‗Tax ‗Tax Ratios and Tax Effort in Developing Countries, 1969-71‘ 1969-71 ‘, IMF Staff Papers, Washington DC: Sign Up International Monetary Fund. By registering a Scribd account, you agree to our

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Craig, John (2000), ‗Evaluating ‗Evaluating Privatisation in Zambia: a Tale of Two Processes‘ Processes‘, Review of African Political Economy, 27:85, 357-366. Eunomix (2013), ‗Is Africa‘s ―Great Boom Sustainable? Growth, Prices and the Resource Rent between 1970 and 2010‘. Fernholz, Fernando (2004), ‗Debt Management and Debt Relief during the 1990s‘, 1990s‘ , in Hill, C. & McPherson, M. (eds.), Promoting and Sustaining Economic Reform in Zambia, Harvard University Press, Cambridge, Massachusetts. Gulhati, Ravi (1989), ‗Impasse in Zambia: the Economics and Politics of Reform‘, EDI Development Policy Case Series, Analytical Case Studies 2 , Washington DC: The World Bank. Gwilliam, K., Foster, V., Archondo-Callao, R., Briceno-Garmendia, C., Nogales, A. and Sethi, K. (2008), ‗The burden of maintenance: Roads in subSaharan Africa‘ Africa‘. Africa Infrastructure Country Diagnostic Background Background Paper 14, Washington DC: The World Bank.

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Sitko, N, Bwalya, R, Kamwanga, J and Wamulume, M (2012),  Assessing  ‗Assessing the Feasibility of Implementing the Farmer Input Support Programme through an Sign Up With Facebook  Electronic Voucher System in Zambia‘ Zambia‘. Indaba Agricultural Policy Research Institute Policy Brief No. 53. Lusaka. Sign Up With Google

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