1. An Analysis Of Constraints To
Inclusive Growth In Zambia
Presented by
Ngoza Munthali
IGC Growth Week, LSE

2. Purpose of the Presentation
Provide a summary of constraints to inclusive growth in
Zambia based on the report done by MCA-Zambia on “An
Analysis of Constraints to Inclusive Growth in Zambia”

3. Outline of the Presentation
• Methodology
• Findings
• Issues for discussion

4. Methodology
• Inclusive Growth (IG) diagnostic framework – a
modification of the Hausmann, Rodrick and Velasco
(HRV) growth diagnostic framework
• IG framework premised on productive employment as the
main channel for achieving sustainable and inclusive
growth

5. Methodology

6. Methodology
• Describing the growth process and determining the
relevant growth story question/s
• Finding the binding constraints based on the
employability and business environment analysis
• Identifying the root cause/s of the binding constraints

7. Growth Story

8. Growth Story

9. Growth Story
• Real GDP growth driven by developments in the international
price of copper and its impact on the mining sector
• Further depression of real GDP growth during the period 1973
to mid 1990s due to poor response to the large TOT shock
✤ Heavy borrowing to finance consumption and investment in
capital intensive import substitution industries
✤ Price controls, subsidies, etc
• Late 1990s beginning of diversification by capitalising on
Zambia’s advantage in land-intensive primary goods

10. Growth Story
• Mining products still dominate merchandise exports
(76%) making Zambia vulnerable to TOT shocks and
Dutch disease effects
• The extent of the value-addition of the country’s exports
also remain low despite broadening of its export
products and markets

11. Growth Story
Aggregate poverty levels declined only slightly and remain high, especially in rural areas

12. Growth Story
Most rural poor are smallholder subsistence farmers...
Mean shares of household income by source, income quintile, rural areas

13. Growth Story
Labour productivity is much lower in agriculture 23% 7%
than other sectors in which 70% of the Zambians 70%
earn their income
Value added per worker in Zambia

14. Growth Story
Most urban poor are engaged in informal businesses and rely
on multiple activities as a source of income
Mean shares of household incomes by source, by quintile, urban areas

15. So What Are The Growth Story Questions?
• Why has Zambia’s GDP per capita growth not reached
levels attained in the first years of independence?
• What is constraining growth from being more inclusive
and making a serious dent on poverty?

16. Binding Constraints Findings
Inclusive Growth Framework

17. Binding Constraints Findings
• Poor health status and low productivity are binding
constraints
✤ HIV/AIDS have lowered annual real GDP growth on
average by 0.3 percentage points since 1992
✤ Access to education beyond primary level a constraint
to productive employment including specialized skills

18. Binding Constraints Findings

19. Binding Constraints Findings

20. Finance

21. Finance
• Access to finance and high cost of finance a challenge for
MSMEs
• Poor financial intermediation attributed to this challenge
✤ Small size and coverage of the banking sector
• Low incomes among MSMEs leading to low demand for
financial services
• Overall, access and high cost of finance not a binding
constraint
✤ Private sector credit % of GDP increasing, interest
rates spreads narrowing, domestic savings as a share
of GDP increasing

22. Infrastructure

23. Infrastructure
• Infrastructure services are binding constraints in the following
areas:
✤ Electricity supply – access is declining, delays in
connections (93 days), quality of service is poor
✤ Water supply and sanitation – access to piped water on the
decline, average consumption of water for drinking & other
domestic use for rural households about 20 litres well
below the average required for achieving a clean disease
free environment
✤ Feeder roads
✤ Poor land transport links and high travel costs
✤ Railway transport

24. Natural Capital and Geography

25. Natural Capital and Geography
• Natural capital and geography not binding constraints
• Concerns in the following areas:
✤ Future growth risks due to climate change effects
✤ Degradation of soils in some parts of the country
✤ Unsustainable exploitation of natural capital
✤ Difficult to reach export markets and access cheap
imports because of Zambia’s landlocked status

26. Government Failures

27. Government Failures
• Micro risks
✤ Not a binding constraint - investment and business
climate has improved over the last five years
✤ Areas of concern – time and cost to export and import
across borders, high costs of licensing, high redundancy
costs, low public sector implementation capacity

28. Government Failures
Doing business ranking improving…

29. Government Failures
• Macro risks
✤ Not a binding constraint
✤ Areas of concern – exchange rate fluctuations and
appreciation pose a challenge to the growth of non-
traditional exports (the question of the Dutch Disease
effect), public finance sustainability and governance

30. Market Failures

31. Market Failures
• Coordination and information failures are binding
constraints, especially to export sophistication
✤ Coordination failures attributed to infrastructure service
related inputs, energy, transport and water which
provide a link between producers and consumers and
information failures such as marketing, research and
product quality development
• Coordination and information failures more severe for the
poor who cannot afford the fixed costs associated with
finding alternative sources

32. Recap of the Constraints
• Low productivity and poor health status are at the root of
low employability of the Zambian population
• Poor infrastructure services - electricity, road
connectivity, rail transport and water supply and
sanitation especially in rural and peri-urban areas
• Coordination failures – failure to provide complementary
goods and services to help private investors to be
profitable, innovative and competitive

33. Issues for Discussion
• High cost of finance not a binding constraint especially for
MSMEs – heavily contested
• Railway transport – does it really offer an alternative to the
current inadequate land transport?
• Exchange rate appreciation and Dutch disease effects – is
it a binding constraint?
• Export diversification versus export sophistication – what
has happened in the last 17 years?

34. Thank you for your attention!

35. CONSTRAINTS TO GROWTH IN
ZAMBIA
Anthony M. Simpasa
Financial Markets Department
Bank of Zambia
Discussion on Presentation made at the
Growth Week 2011 Conference
Zambia Session
London School of Economics
September, 2011
1

36. CONTENTS
1. Introduction
2. Overview of macroeconomic performance
3. Constraints to Growth
4. Policy Options and Potential Benefits
5. Conclusion
2

37. 1.0 Introduction
 Zambia’s growth record has been dismal historically, but recent evidence
shows a strong recovery in economic performance
 Real Gross Domestic Product (GDP) growth has averaged above 5% per
annum over the past decade.
 The unique feature of this growth momentum is that it has been broad
based and less variable.
 Underpinned by favourable macroeconomic policy environment coupled
with strong private sector response
 But accelerated growth hampered various constraints
3

38. 2.0 Overview of macroeconomic
performance
 Over the past decade years, Zambia’s macroeconomic performance has been
reflected in:
 Positive Real GDP growth, which has averaged 5.6% per annum from 2001-2010
(see Chart 1);
 Rising per capita GDP to US$1,253 in 2010 from less than US$350 in 2001
 Economic growth has been broad based, signaling efforts for diversification;
 Inflation declined to single digit of 7.9% in 2010 from 18.7% in 2001;
 Declining lending rates to an average of 14.4% in 2010 from 54.6% in 2001; and
 Strong real exchange rate
 Easy of doing business in Zambia ranking from 84 in 2010 to 76 in 2011 (World
Bank, 2011). Ranked 4th in Africa.
4

39. 2.0 Overview of Macroeconomic
performance

40. 2.1 Macroeconomic stability and
investment
 Due to macroeconomic stability, the country is now building
resilience to external shocks;
 Evidenced by rapid recovery from the effects of the global economic
crisis;
 This raises prospect of durable economic growth;
 …as foreign direct investment has increased;
 Driven largely by the boom in the mining industry and the associated
second order effects (e.g., construction boom);
 Total FDI in 2009 stood at US$7.5 billion, US$4.5 billion of which
was recorded in the mining industry (GRZ, 2010);
 The current period of expansion is the strongest and lengthiest that
the Zambian economy has witnessed in recent memory;
 Zambia recently reclassified as a low middle income country;
 Credit rating of B+ by Fitch and, Standard and Poors.

41. 3.0 Constraints to Growth
 Despite the favourable developments, the country still suffers
from long-standing economic bottlenecks and structural
impediments;
 Undermined competitiveness, limited job creation and derailed
poverty reduction efforts;
 Sources:
 high indirect costs related to infrastructure deficiencies and inefficiency
 inadequate skills and costs associated with service-related inputs
 Macroeconomic stability is essential but needs to be supported by
structural and micro-level policy reforms;
 This will enable the country to reach a high threshold of a
competitiveness driven growth.

42. Constraints
• The fundamental constraint to Zambia’s growth is the inadequacy
and poor quality of infrastructure, in its broadest sense;
• Unavailability and low quality of infrastructure have reduced economic
returns to private investment;
• Hard infrastructure - roads, railways, storage facilities, etc.;
• ‘Soft’ infrastructure - information communications and technology,
institutions;
• Laws and other governance related structures (e.g., contract
enforcement procedures;
• Key in enhancing efficient investment and competitiveness
8

43. Constraints
 Electricity and energy
 Hydropower major source (99.4% in 2006);
 Excess demand, largely driven by mining activity;
 Long delays in providing electricity connection - 100 days to connect;
 Frequent disruptions – result in losses averaging more than 8% of output
 Low use of alternative energy (e.g., solar, wind, etc)
 Transport
 High transportation costs;
 Poor state of the road network and dilapidated railway system.
 Paved road percentage is low and concentrated in the urban areas;
 Poor state of roads (feeder) limits market access and integration;
 This has created obstacles to increases in rural incomes and perpetuated high
poverty levels;
 Inadequacy of air transport facilities hinders tourism development;
9

44. Constraints
 Irrigation and large water works
 Most of Zambia’s agriculture production is rain fed;
 Water retention facilities (dams, etc.) and harvesting techniques
are generally underdeveloped;
 Inadequate irrigation infrastructure;
 As a result, water productivity – GDP/water use – is only $1.6 in
2000 constant prices;
 This has limited agricultural productivity and the choice of crops in
the areas lacking irrigation services
10

45. Constraints
 Water and Sanitation
 Despite advances made in regulating and commercialisation of
the water supply system;
 Underinvestment in public water and sanitation supply facilities
due to budget cutback (Dagdeviren, 2008);
 Firms and households self-provide;
 Lack of regulatory enforcement of illegal connections and
dumping of waste, unplanned installations of water facilities such
as sinking of boreholes;
 Poor sanitation affects health of the population due to the spread
of water borne diseases
 Costly treatment of preventative diseases
 Effects on labour productivity as well.
11

46. Constraints
 Labour Productivity
 Zambia is a highly capital intensive economy despite excess
labour supply;
 Capital use per unit of labour estimated at more than three times
its East African peers;
 Only 23 cents per dollar of each unit of capital employed is
translated into value added, compared with Uganda’s 70 cents
(World Bank, 2003);
 This has resulted in severe diminishing returns to capital;
 Real cost of labour high to due to low levels of labour
productivity;
 The cost of labour is also high due to high severance and
redundancy cost of more than 140 weeks of wages.
12

47. Constraints
 Information communication and technology (ICT)
 Over the past few years, there has been considerable growth in the
telecommunications sector;
 Marked by phenomenal private investment;
 Three service providers, one recently privatised;
 In 2006, 46% of the population was within reach of a mobile signal.
This rate has increased to above 62%;
 However, fixed line connectivity remains poor, particularly in rural
areas where it is virtually non-existent;
 Information and technology sub-sector also lagging behind;
 Internet connectivity is characterised by poor coverage - only 1.2
secure internet servers per 1 million people
 Zambia’s connection is largely through satellite - limited bandwidth and
transmission delays.
13

48. Constraints
 Undeveloped financial markets and cost of capital
 Financial liberalization has significantly improved the financial
landscape;
 FSDP I emphasised need to develop financial sector
 FSDP II focusing on competition, accessibility, inclusion, literacy, etc.
 More participants – banks, NBFIs, institutional investors;
 However, the financial sector remains shallow and illiquid;
 Financial sector dominated by the banking industry;
 Capital market still underdeveloped
 Lack of diverse sources of long-term finance
 Cost of credit still high for a majority of private firms, particularly the
SMEs (World Bank, 2008);
 Wide spreads and high real lending rates (>17% and 12%);
 Credit Reference Bureau established to address information
asymmetry related constraints to credit access
 FinMark Trust surveys attribute low inclusion to both demand and
supply factors;
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49. Policy Options
 Increasing public investment in infrastructure
 Exploring different financing mechanisms such as PPP;
 One-stop border points part of PPP framework
 Expansion of electricity generation capacity also taking PPP route;
 The government has also placed rural electrification high on the agenda to
accelerate economic development in rural areas;
 Tariffs revision to attract the private sector in the electricity industry;
 In the transport sector, the government has earmarked to spend more than
90% of the total transport resource requirements on roads under the SNDP;
 Upgrade airports – Kasaba bay, Mfuwe, Livingstone, etc
 This should help reduce freight costs and improve efficiency of
transportation services;
 Grading of feeder roads to improve access to agricultural markets
15

50. Policy Options
 Liberalisation of international gate way to reduce connecting tariffs
 Improve quality of infrastructure, particularly ICTs to bridge the rural-
urban divide and enhance communication and market access;
 Enhancing state capacity to improve efficiency of the public service and
governance institutions;
 Luiz (2009) provides evidence that African states do not possess this
level of capacity but it garnered innovative partnerships.
 Reducing commodity dependence and diversifying the economy
 Need to expand the export base, focussing on value adding non-
traditional exports will raise the country’s foreign exchange earning
capacity;
 Continued implementation of macroeconomic and structural reforms will
unlock potential of the country to register higher growth
16

51. Potential benefits
 Absence of data – affects quantification of financial losses to the
economy from various infrastructure deficiencies;
 Estimates suggest sizable potential benefits that would accrue from
improvements in infrastructure services.
 In Zambia, increasing investment in infrastructure to the tune of the
required US$500 million will eliminate the inefficiencies that cause the
loss of $300 million per annum;
 Improving Zambia’s infrastructure endowment could boost output growth
by up to 2 percentage points per annum (Foster and Dominguez, 2011);
 Enterprise surveys have also shown that improving infrastructure will
raise firm productivity by about 50 per cent;
 Removing governance distortions, red tape and slippages will account for
the remaining half;
17

52. Potential benefits
 Skills upgrade will trigger huge productivity gains and facilitate innovation
and technology diffusion;
 Need for government to set the agenda for investing in skills enhancing
areas such as upgrading the technical and vocational training and
reforming labour laws;
 Improving healthcare services and accessibility, including continued efforts
at combating the spread of HIV/AIDS will strengthen the human capital
base;
 This will ensure that the poor benefit from future growth of the non-farm
economy;
 Tackling market coordination failures must be approached with equal
vigour in order to avoid interrupted reforms and growth spurts;
 Enhancing state capacity and improving effectiveness of governance
institutions, would reduce cost of delays, say in, contract enforcement,
currently 39% of claim;
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53. 5.0 Conclusions
 Infrastructure deficiencies have undermined industrial productivity
and reduced the potential of the economy to grow at a much faster
pace;
 High cost of credit stifled growth of SMEs and left economy trapped in
informality
 Zambia needs to create the right conditions to exploit the advantages
of information-based technology to enhance productivity and
competitiveness of the private sector;
 Improving efficiency of the public sector and strengthening state
capacity in implementing key policies is critical in improving business
environment;
 Explore new models of financing infrastructure investment;
 Emphasise need for regulatory and institutional change and
recommending avenues for more efficient planning and delivery of
infrastructure services;
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54. Conclusions
 Assess potential cost savings arising from improvements in infrastructure
services to avoid creating unproductive public investments;
 There is need to rethink the diversification strategy - move away from a
comparative advantage driven growth to competitive advantage;
 The reasons to take deeper and more meaningful policy measures is simple:-
 Zambia is experiencing unprecedented investment and growth expansion cycle
– where businesses need access to capital and other input services;
 Failure to sustain this growth momentum would have significant consequences
to the real economy and poverty reduction.
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55. THANK YOU
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