Abstract
This Selected Issues paper analyzes sources of growth in Zambia. It assesses domestic debt dynamics and expenditure composition under two scenarios: first, the execution of the fiscal adjustment envisaged in the 2004 budget and in the medium-term framework; and second, the continuation of recent trends. The paper assesses movements in the external value of the kwacha using a number of different approaches. It also looks at developments in the real exchange rate and in differentials in rates of return on financial assets in Zambia and key financial centers.
I. Sources of Growth in Zambia 1
A. Background
1. Zambia has had a mixed long-term record of growth since 1964. In the first decade after independence, growth averaged 7½ percent a year, as a strategy of import-substituting industrialization and state ownership was supported by a strong copper sector. Since then, real GDP has grown annually by less than 1 percent (Figure I.1). After the oil price shocks of the 1970s, which coincided with the beginning of a long-term decline in copper prices, Zambia resorted to exchange and trade controls rather than restructure the economy. During the 1980s, attempts to reform the economy to support diversification away from the failed policy of state-led industrialization were subject to frequent reversals Extensive market-oriented reforms began with a return to a multiparty political system in the early 1990s, and, by 1994, virtually all exchange controls on current and capital transactions had been removed.
Real GDP Growth, 1964-2003
(In average annual percent change)
Citation: IMF Staff Country Reports 2004, 160; 10.5089/9781451841206.002.A001
Real GDP Growth, 1964-2003
(In average annual percent change)
Citation: IMF Staff Country Reports 2004, 160; 10.5089/9781451841206.002.A001
Real GDP Growth, 1964-2003
(In average annual percent change)
Citation: IMF Staff Country Reports 2004, 160; 10.5089/9781451841206.002.A001
2. The main structural change in the economy has been the reduced reliance on the copper sector. Copper revenues provided almost all export earnings and about half of GDP in Zambia’s first decade following independence. A collapse in copper prices and inefficiencies in the state-owned Zambia Consolidated Copper Mines (ZCCM) removed the sector’s former predominance in the economy. In 2000, copper production, which had peaked at 748,000 tons in 1969, reached a low of 234,000 tons, while the share of mining exports in total exports, which was over 90 percent as late as 1990, dropped to two-thirds.
3. Zambia’s recent revival in growth is partly the result of the reforms of the early 1990s, the privatization of the ZCCM, and the diversification away from the copper sector. Since 1995, real GDP has grown by more than 2 ½ percent a year, a marked improvement over the previous two decades of negative growth. Following the privatization of the ZCCM in 2000, copper production has risen sharply, as a result of both new investments and higher prices. Improved economic policy implementation since 2000 has contributed to real GDP growth of 4 percent a year, driven by agriculture, manufacturing, and trade. This improvement in economic performance is largely attributable to investment and increased efficiency in the economy, as discussed in the next subsection.
B. Growth Accounting
4. A growth-accounting exercise was used to model Zambia’s output from 1990 to 2003 and assess growth projections for 2004 to 2009 in terms of factors of production (capital and labor) and total factor productivity (TFP). Growth-accounting exercises are based on the relationship between output, inputs, and technology, derived from a simple Cobb-Douglas production function:
where ΔY, ΔK, and ΔL denote, respectively, the change in output, capital, and labor, while α and (1-α) are the shares of output that accrue to capital and labor. An annual depreciation of capital (δ) of 5 percent was assumed, an assumption shared by similar studies of countries in the region. The capital share of output (α) was time-variable, and was estimated drawing upon a sectoral method for estimating factor shares.2 It was calculated using the sum of each sector’s weighted contribution to output, and averaged 0.35 over the period.
5. The availability and quality of national accounts data were constraints on this model. World Bank data on labor force was used in lieu of employment, while real gross fixed capital formation proxied for the rate of growth of capital stock, on which a series is not available. To widen the scope of the exercise, one would need a breakdown of output by productive sectors prior to 1990 and data on real gross fixed capital formation prior to 1980. A more detailed study of the contributions of the factors of production to each of the sectors of the economy, would require labor and capital stock data by sector.
6. The projections used for 2004 to 2009 are based on the discussions held with the Zambian authorities during the 2003 Article IV consultation. 3 GDP growth is expected to slow to 3½ percent in 2004 and increase to 5 percent over the medium-term, as envisaged in the Poverty Reduction Strategy Paper (PRSP). Labor force projections from the World Bank were used to estimate the contribution of labor. However, this projection may be an upper boundary, as it may underestimate the impact of HIV/AIDS, and thus a slight downward adjustment was used to capture this effect. Real gross fixed capital formation was projected with a slightly upward trend from around 23 percent of GDP in 2003, which is in line with the recent trend of strong investment.
Growth Accounting, 1990-2009
(Contributions to real GDP growth, in percentage points)
Growth Accounting, 1990-2009
(Contributions to real GDP growth, in percentage points)
| 1990-94 | 1995-2000 | 2001-03 | 2004-09 | ||
|---|---|---|---|---|---|
| Real GDP growth (percent) | -2.7 | 1.8 | 4.0 | 4.6 | |
| Labor | 1.9 | 1.9 | 1.6 | 1.5 | |
| Capital | -0.7 | 1.3 | 1.9 | 1.9 | |
| TFP | -4.0 | -1.3 | 0.6 | 1.2 | |
Growth Accounting, 1990-2009
(Contributions to real GDP growth, in percentage points)
| 1990-94 | 1995-2000 | 2001-03 | 2004-09 | ||
|---|---|---|---|---|---|
| Real GDP growth (percent) | -2.7 | 1.8 | 4.0 | 4.6 | |
| Labor | 1.9 | 1.9 | 1.6 | 1.5 | |
| Capital | -0.7 | 1.3 | 1.9 | 1.9 | |
| TFP | -4.0 | -1.3 | 0.6 | 1.2 | |
7. The increase in real GDP growth since 1995, and especially since 2000, reflects increased investment and a turnaround in TFP growth, which has more than offset the slight decline in the contribution of labor. The stronger TFP performance may be attributed to policy and institutional changes, particularly due to improved macroeconomic management and an enhanced private sector participation in the economy with the privatization of the ZCCM. This is a significant development, as growth can generally be sustained over longer periods of time when it is based on improvements in technology and efficiency—embodied in TFP—rather than on factor accumulation, which is subject to inherent limits based on demographics and diminishing returns.
8. Several risks to the long-term outlook could prevent Zambia from meeting its growth targets. A key risk is that labor force growth may turn out to be slower than currently projected due to the impact of HIV/AIDS. A downturn in copper prices could affect investment in the mining sector. Growth could also be lower if policy reversals were to weaken the institutional framework that has supported the stronger rates of TFP growth in recent years. The projections included here suggest that attaining growth of 4.6 percent per annum from 2004 to 2009 will require a slight increase in the contribution of TFP. However, higher growth (and thus higher rates of employment, investment, and TFP growth) is necessary to decrease the levels of poverty by 2015, in line with the Millennium Development Goals (MDGs).
9. Experience from other countries (Table I.2) suggests that significant gains in TFP, which would be required to bring Zambia closer to meeting the MDGs, are attainable with the support of sustained reforms. To support stronger TFP, it is important to increase the execution of poverty-reducing spending and accelerate the implementation of structural reforms in public expenditure management, financial sector reform, governance, and private sector development.
TFP Contribution to Real GDP Growth
(In percentage points)
TFP Contribution to Real GDP Growth
(In percentage points)
| South Africa | 1980-1993 | 0.0 |
| 1994-2001 | 3.1 | |
| Mozambique | 1981-1984 | -5.1 |
| 1985-1992 | 1.1 | |
| 1993-2001 | 4.0 | |
| Gabon | 1980-1993 | -4.5 |
| 1994-2001 | -0.4 | |
| Tanzania | 1981-1985 | -1.5 |
| 1986-1990 | 0.5 | |
| 1990-2002 | 1.8 |
TFP Contribution to Real GDP Growth
(In percentage points)
| South Africa | 1980-1993 | 0.0 |
| 1994-2001 | 3.1 | |
| Mozambique | 1981-1984 | -5.1 |
| 1985-1992 | 1.1 | |
| 1993-2001 | 4.0 | |
| Gabon | 1980-1993 | -4.5 |
| 1994-2001 | -0.4 | |
| Tanzania | 1981-1985 | -1.5 |
| 1986-1990 | 0.5 | |
| 1990-2002 | 1.8 |
C. Sectoral Growth and Prospects
10. The composition of Zambia’s economy has changed dramatically over the past decade, as mining has dropped from being the largest sector in the economy to the fifth largest. Mining’s share of output has dropped from 50 percent after independence, to around 20 percent in the early 1990s and to about 8 percent today. The largest sectors in 2003 were agriculture, manufacturing, and trade, which together accounted for almost half of the country’s GDP (Table I.3).
Composition of Output, 1990-2003
(In percent of GDP)
Composition of Output, 1990-2003
(In percent of GDP)
| 1990 | 2003 | |
|---|---|---|
| Agriculture | 12.3 | 15.3 |
| Mining | 18.8 | 7.8 |
| Manufacturing | 9.1 | 10.7 |
| Utilities | 2.5 | 3.0 |
| Construction | 7.3 | 6.5 |
| Trade | 15.0 | 18.6 |
| Real estate/business | 4.1 | 9.5 |
| Other services | 30.8 | 28.5 |
Composition of Output, 1990-2003
(In percent of GDP)
| 1990 | 2003 | |
|---|---|---|
| Agriculture | 12.3 | 15.3 |
| Mining | 18.8 | 7.8 |
| Manufacturing | 9.1 | 10.7 |
| Utilities | 2.5 | 3.0 |
| Construction | 7.3 | 6.5 |
| Trade | 15.0 | 18.6 |
| Real estate/business | 4.1 | 9.5 |
| Other services | 30.8 | 28.5 |
11. Although mining lost its leading position in the Zambian economy during the 1990s, it has reestablished itself as one of the main sectors driving growth since 2001 (Table I.4). The mining sector has recovered some of its prominence in the economy, following the privatization of the ZCCM, which has facilitated an increase in production of copper and cobalt, and with the benefit of higher world prices of these commodities. However, many linkages with local industries were lost, as the new mining companies drew upon lower-cost suppliers in the region. Furthermore, the overburdening of local smelters has led to some copper ores being sent to South Africa for processing, thus reducing the domestic value added in copper exports.
Sectoral Growth, 1991-2009
(Contributions to real GDP growth, in percentage points)
Sectoral Growth, 1991-2009
(Contributions to real GDP growth, in percentage points)
| 1991-94 | 1995-2000 | 2001-03 | 2004-09 | ||
|---|---|---|---|---|---|
| Real GDP growth (percent) | -3.0 | 1.8 | 4.0 | 4.6 | |
| Agriculture | -0.1 | 0.9 | 0.0 | 0.6 | |
| Mining | -1.0 | -1.5 | 0.8 | 0.7 | |
| Manufacturing | -0.1 | 0.3 | 0.5 | 0.6 | |
| Construction | -0.7 | 0.1 | 0.8 | 0.8 | |
| Trade | -0.5 | 0.9 | 0.9 | 0.9 | |
| Other | -0.6 | 1.1 | 1.0 | 1.0 | |
Sectoral Growth, 1991-2009
(Contributions to real GDP growth, in percentage points)
| 1991-94 | 1995-2000 | 2001-03 | 2004-09 | ||
|---|---|---|---|---|---|
| Real GDP growth (percent) | -3.0 | 1.8 | 4.0 | 4.6 | |
| Agriculture | -0.1 | 0.9 | 0.0 | 0.6 | |
| Mining | -1.0 | -1.5 | 0.8 | 0.7 | |
| Manufacturing | -0.1 | 0.3 | 0.5 | 0.6 | |
| Construction | -0.7 | 0.1 | 0.8 | 0.8 | |
| Trade | -0.5 | 0.9 | 0.9 | 0.9 | |
| Other | -0.6 | 1.1 | 1.0 | 1.0 | |
12. The mining sector’s recent strong contribution to growth should continue over the medium term. Improvements in technology have expanded the life span of many mines and their potential copper and cobalt output. Two new mines in Kansanshi and Lumwana are expected to start operating in the next three years. These developments, as well as firmer copper prices, could allow total production to approach 600,000 tons per year in the medium term, provided that there is an appropriate extension and maintenance of infrastructure and inputs (roads, water, fuel, electricity, and acid). Increased output and investment in these mines will have some positive spillover effects in the economy. The manufacturing, utilities, and construction sectors should receive a boost from higher copper production.
13. Agriculture is one of the main drivers of growth in the economy, although its contribution is often affected by droughts. Small-scale farms produce the bulk of output, but productivity is higher on large-scale farms, which are involved in the production of maize and of cash crops for export, such as tobacco, groundnuts, and cotton. From 1995 to 2002, agricultural and horticultural exports’ share in nontraditional exports increased from 19 percent to 29 percent.
14. Better access to inputs and decreased vulnerability to drought are two of the main factors underlying improved medium-term prospects for agricultural growth. Zambia’s abundant and largely underutilized arable land resources (55 percent of total area of 75 million hectares) suggest strong potential for agricultural growth. Increased access to inputs (such as irrigation, seed, and fertilizer) and greater access to financing could improve yields on small-scale farms. The continued inflow of experienced farmers from Zimbabwe could also bring in valuable skills and expertise for the production of cash crops, such as tobacco, cotton, and horticulture. A World Bank paper4 suggests that the sector’s potential can be augmented through increased availability of fertilizer, ownership of cattle and draught animals, and access to credit. The government intends to keep prioritizing the availability of inputs for small-scale farmers and outgrower schemes, as well as follow a consultative process to convert more traditional lands to state lands, which would increase the availability of land for large-scale farms. Decreasing the country’s susceptibility to drought, by improving irrigation and the growth of more resistant crops, should reduce volatility in the sector and strengthen its contribution to long-term growth.
15. Manufacturing has regained prominence as an important source of growth since the mid-1990s. Although industrial production has decreased since 1991, the sector has benefited from growth in agriculture and mining, as well as increased private sector activity, due to the liberalization of the economy and including the trade and exchange regimes.
16. The manufacturing sector is projected to continue to benefit from spillover effects from growth in the mining and agricultural sectors. There is potential for growth in several subsectors of manufacturing, including agro-processing (agro-related industries account for 84 percent of manufacturing value added), textiles, leather, and furniture. The government aims to boost the sector through investment promotion, institutional support, skills training, and increased access to concessional financing for equipment procurement for small-scale manufacturers. The Industrial and Labor Relations Act may also be revised to streamline bargaining mechanisms. The sector should also continue to profit from Zambia’s regional trade agreements—the Common Market of Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC)—as well as from the U.S. African Growth and Opportunity Act (AGOA).
17. Other sectors that have recently driven growth include trade, construction, and tourism. The structural reforms of the early 1990s have allowed wholesale and retail trade to become one of the main sectors in the Zambian economy—it has contributed almost 1 percent of GDP growth per year since 1995. Meanwhile, the construction sector has boomed since 2001, due to increased investments and the revival of the mining sector. In tourism, infrastructure improvements and the upgrading of Livingstone airport should attract more arrivals.
D. Conclusion
18. Zambia has a large potential for growth across several sectors of its economy. Mining has regained a prominent role in the economy, which it should maintain due to new investments expected over the medium term. Agricultural growth should come from increased access to inputs, the influx of new skills, and better resistance to the effects of drought.
19. In the long run, growth prospects depend importantly on policies and institutions that support reforms to tap the potential for growth in the productive sectors of the Zambian economy. These reforms will help to maintain strong TFP growth, reduce unemployment (by increasing labor market flexibility and lowering the costs of labor relative to capital), and improve the investment environment and private sector participation across all sectors. Key elements of this strategy for more rapid growth and poverty reduction include the consolidation of macroeconomic stability, improved public expenditure management, a removal of obstacles to investment and private sector growth, and financial sector development.
20. The growth projections presented here should therefore be viewed as a middling scenario, with downside risks and upside potential. The main risks include the effect of HIV/AIDS, lower copper prices, and possible policy reversals weakening the institutional framework that has supported the stronger rates of TFP growth in recent years. Higher growth could come from increased human capital investment, the implementation of more structural reforms, and higher growth of TFP.
References
Deininger, Klaus, and Pedro Olinto, 2000 “Why Liberalization Alone Has Not Improved Agricultural Productivity in Zambia: The Role of Asset Ownership and Working Capital Constraints,” Working Paper 2302 (Washington: World Bank).
Sarel, Michael, 1997, “Growth and Productivity in ASEAN Countries,” IMF Working Paper 97/97 (Washington: International Monetary Fund).
Prepared by Gustavo Bagattini.
See Sarel (1997), pp. 12-17, for background on the sectoral capital shares of output.
See Staff Report for the 2003 Article IV consultation.
