What Are the Constraints to Inclusive Growth in Zambia? Elena Ianchovichina and Susanna Lundström Employment and Shared Growth Workshop, Oxford March 16, 2008

Income increases through productive employment Poverty Reduction Economic Growth Self-employed Wage-employed Business Environment Analysis Employability Analysis Viewed from the perspective of the poor as productive actors…

Three Main Parts The overall dynamics and what it tells us about the potential in different sectors Growth-Poverty Pattern, Sector Dynamics and Productivity Dynamics Identifying the productive activities and resources of the poor Going through the extended tree with the objective of increasing in a sustainable way the income of the poor Given the characteristics and future opportunities of the poor identified in step one and two.

Increased and less volatile growth rates Introduction

Development driven by discrete events or potentially sustainable growth?

Loans to the private sector

Rural poverty reduction not responsive to growth

Inverse relation between productivity levels/growth and employment levels Paths out of poverty has mainly been through new employment opportunities in low-cost urban areas, or higher returns in other urban areas Productivity growth has been on the rise except in agriculture where also employment opportunities has stagnated

What are the sources of income for the rural poor in Zambia? Most rural poor are smallholder subsistence farmers

What are the sources of income for the urban poor in Zambia? Most urban poor are employed in informal businesses and rely on multiple activities as a source of income

Any reasons to focus on agriculture? Evidence that there is potential for productivity improvement in agriculture Even a sizable increase in employment in urban industries will result in relatively few urban jobs

Implication of the booming mining sector The capital intensive nature implies that few new jobs are created Adverse REER effects on the competitiveness and job opportunities of the tradable sectors

Look for constraint to inclusive growth through: Self as well as wage employment Agriculture as well as non-agriculture activities Up-coming data on employment and additional analysis may help to narrow down further

Employability Analysis: Education, Health Income increases through productive employment Poverty Reduction Economic Growth Self-employed Wage-employed Business Environment Analysis Employability Analysis: Education, Health Viewed from the perspective of the poor as productive actors…

Is education a major constraint for the poor as individuals? Percentage of households with access to education facilities within five kilometers Major difference in mean years of education between the rich and poor households in urban areas, and limited access to higher education in rural areas

Is health a major constraint for the poor? HIV/AIDS costs almost 1 percent in GDP growth per year Prevalence rates are high: 17% of working age population in 2005 compared to the SSA average of 6%. High prevalence rates combined with poor health care provision and other diseases undermine Labor stock and ability to provide labor; Productivity of the work force; Incentives for investment;

Business Environment Analysis Income increases through productive employment Poverty Reduction Economic Growth Self-employed Wage-employed Business Environment Analysis Employability Analysis: Education, Health Viewed from the perspective of the poor as productive actors…

Is the cost of capital a binding constraint to firms’ investment and growth?

But, cost and access of capital differentials are sizable Access and cost of capital varies with the size of the firm In 2003, nearly 50 percent of larger firms had a loan, while only 19 percent of small firms had a loan The cost of capital differential between large and small firms was more than 10 percentage points Similar differentials existed between the cost of capital of exporters and non-exporters, domestic and foreign companies Micro firms face even steeper constraints

What are the reasons for the poor access to and high cost of finance for small and micro firms? Poor financial intermediation rather than low domestic savings or bad international finance Domestic savings as a share of GDP climbed up from 6% in 1990s to 18.1% in 2006, a share higher than the SSA average FDI and aid have been higher than the average for SSA and LICs both in 1990s and 2000s However, there are signs of improvements: the percentage of people identifying the cost of finance as the main reason for their poverty status halved in the period 2002-06

The majority of the poor cannot afford to obtain financing which brings us to the issue of returns of economic activity.

Do low social returns constrain income growth? Zambia is well endowed with natural resources Landlocked geographic position: Pros: Serves as an import tax protecting domestic import-competing industries; borders 8 countries and plays an active role in regional trade Cons: reaching global markets and realizing economies of scale is a problem Affects ability to export bulky low–value products (e.g. farm products) Requires well-developed air transport and an emphasis on high value, low weight and volume goods

Access to air transport is low for Zambia’s level of per capita income

Are infrastructure and basic services a binding constraint to income growth? High domestic transport costs due to poor domestic road condition and high fuel: affect the ability of rural residents to access markets; The reasons for poor access is not always because of limited supply (e.g. electricity), but because of industry structures and interests Poor quality and expensive basic services undermine the competitiveness of firms and slow down job creation

Cost-structure: firm-level averages Source: Eifert, Gelb, and Ramachandran (2005)

Connectivity services Mobile rates per minute Source: Mattoo and Payton (2007)

Is the macroeconomic environment a binding constraint to shared growth Is the macroeconomic environment a binding constraint to shared growth? Exchange rate developments Macroeconomic situation has improved since 2003 Single digit inflation in 2006 Favorable terms of trade But, the sharp real appreciation of the Kwacha since 2005 is a major problem: Factors include: Debt relief and scaling up of aid FDI into mining Strong export performance Tight monetary policy Negative impacts on some sectors and employment; threatens the progress made in diversifying the export base and jumpstarting non-traditional exports

Are property rights over land a major constraint to income growth? Customary land arrangements with limited transfer possibilities are dominant, with only 6-15% of land under statutory tenure The land system is not perceived as a binding constraint to shared growth Land is abundant – only 40% of arable land is used Most smallholders who demand more land get land from their chiefs (only 4% of respondents mentioned lack of land as a reason for poverty) Despite small plot sizes, a typical household does not have capability to cultivate more land The system creates risks to future returns on investments Lack of serviced land with access to infrastructure is a perceived binding constraint to operations implying not land, but rural infrastructure is a bottleneck

Is regulatory uncertainty and government interventions an obstacle to shared growth? Regulatory uncertainty is the fourth most binding constraint to firms’ operations Most of firm owners (70 percent) think that officials’ interpretation of regulations is inconsistent and unpredictable Problem is especially acute in agriculture Fertilizer subsidy program Last minute contracts push up the cost of the input Program not well targeted opens opportunities for rent seeking Program is expensive (accounts for 50% of the budget earmarked for agriculture, compared to only 3% for irrigation and other rural infrastructure)

Is governance a constraint?

Are market failures binding constraints for income growth? Firms need services requiring simultaneous, large scale investments in: basic infrastructure and connectivity services which ensure access to inputs and foreign markets; marketing, state-of-the-art technology, and product quality information services Might be a development trap: No incentives for private investor before a certain level of economic activity Especially severe in sparsely populated countries

Rural-urban differentials in connectivity service provision Poor access and high cost of basic services are major constraints to growth Rural areas are at a disadvantage relative to urban areas Number of households with access to facilities within 5 km Farm level productivity is negatively correlated with weak service performance Examples where there were positive coordination externalities (e.g. outgrower schemes)

Bindings constraints to shared growth in Zambia Lack of positive coordination externalities (rural-urban connectivity) Poor government effectiveness Regulatory uncertainty and government interventions (stop doing harm before doing good, especially severe in agriculture) Real exchange rate appreciation (international connectivity) Access to post-primary education and health for the poor

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Appendix: Incidence of poverty by stratum (%)

Appendix: Number of people employed by stratum