Quarterly Bulletin

 Thilst it cannot be denied that diversification is key to economic growth and poverty reduction, many years after independence, Zambia continues to heavily depend on one sector, the mining sector. Poverty reduction strategies cannot only be seen as a trickle-down effect from economic growth but direct interventions at reducing poverty. Diversification and poverty reduction cannot happen without good governance. Leonard Chiti stresses the link between diversification in Zambia, reduction in poverty levels and the importance of good governance in the whole process.

In recent months, a lively debate has ensued over the unsuccessful diversification of the economy. On the one side of the debate are those who emphasise external constraints to explain the slow pace of the diversification on external factors. On the other side are those who, while acknowledging that external factors play a significant part in the diversification process, point out that internal factors such as poor governance play a crucial part.

Since the discovery of copper ores in the 1920s, Zambia has relied heavily on copper exports for its foreign exchange earnings. When copper prices are high, the  country earns significant amounts of foreign currency to finance its development agenda. However, when the prices of copper are low on international commodity markets such as the London Metal Exchange, the country’s export earnings have declined as well. The decline in foreign earnings has always had adverse impacts on government capacity to deliver on its promises to improve the living standards of its citizens, particularly those who live in rural areas where poverty is extremely high.

Zambia’s dependence on copper exports to finance its poverty reduction efforts has so far proved that such dependence cannot lead to long term sustainable development. Hence, the need to diversify its revenue base to meet its development needs and ensure long term sustainability.

This article intends to participate in the diversification debate in the light of recent developments in the global economy. Firstly, it will give a brief historical account of the diversification process in Zambia. Secondly, it will suggest a strong link between the lack of diversification and the high poverty levels and argue that diversifying the economy can contribute towards reducing poverty in Zambia. Thirdly, it will suggest that one of the most important factors inhibiting the diversification process is poor governance. Finally, it will raise the question of whether government commitments towards reducing extreme poverty by half by the year 2015 can be met given (a) the poor and unsuccessful efforts at diversifying the economy in the recent past and (b) the prevailing economic downturn.

Diversification of the economy: historical overview

The diversification debate is not new. It goes back to pre-independent Zambia when the colonial administration recognised that relying on copper exports for government revenue was not a long-term sustainable strategy (UNDP, 2006). Following Independence, the post-colonial government indicated in the First National Development Plan (1966-1971) that diversification of the economy would be accorded high priority (GoZ, 1966). Since then every national development plan including the latest, the Fifth National Development Plan (2006-2011), has reiterated the same objective. In recent years, Poverty Reduction Strategy Papers (PRSPs), inspired by neoliberal economic agenda and sponsored by aid donors, have picked up on the same theme. Finally, the National Agricultural Policy (2006-2015), stresses the need to invest more resources in the agricultural sector in order to boost productivity (GoZ, 2007). Clearly, it can be observed that the state recognises that diversifying the economy is imperative given the volatility of international commodity markets and the existence of huge potential in other sectors of the economy. However, in spite of the policy declarations sufficient progress in diversifying the revenue base is lacking.

Various factors can be advanced to explain why government actions clearly set out in these government documents have yielded unsatisfactory results. The basic factor retarding the diversification process has always been lack of sufficient investments in sectors such as agriculture and tourism that have the potential to earn the state sufficient export revenues. In the second decade of independence for example, the State was constrained from investing in these sectors due to the world recession prevailing at the time when copper prices were low and oil prices were high. This led the state to borrow from international financial institutions (IFIs) and other multilateral and bilateral bodies to finance its development activities. As the country repeatedly borrowed money, it fell into heavy debt. The country’s fiscal condition was further hindered by its commitment to the 1970’s liberation wars which diverted national resources away from investment into other sectors of the economy (UNDP, 2006). Lack of sufficient progress in diversification has only exacerbated the already existing inequalities in the country whereby the poor, living in rural areas and relying on agriculture to earn a living, continue to suffer while those living in urban areas appear to prosper.

Diversification of the economy and poverty reduction

The rural population has for much of Zambia’s history remained significantly deprived. For a country that is so rich (potentially), it is scandalous to observe high poverty levels. Recent anecdotal evidence suggests that poverty levels have reached 80%. Agriculture is the lifeblood of rural people. However, only 12% of arable land is currently under cultivation yielding 22% to export earnings. The figures above suggest that raising the percentage of land cultivated will increase household incomes and contribute towards increasing the share of exports from agriculture. Developing the agriculture sector will benefit the majority of Zambians by providing jobs, food, raw materials for industries, markets for manufactured goods and foreign exchange earnings. This will significantly reduce poverty levels. Therefore, investing in agriculture constitutes an important step towards diversifying the economy.

In recent years following the country reaching the Highly Indebted Poor Countries (HIPC) completion point, the country has made poverty reduction a high priority. Being an aid dependent country, Zambia, like many developing countries, has drawn up poverty reduction strategy papers (PRSPs) as a condition for receiving further aid. Three PRSPs have subsequently been drawn up since 2001. These papers propose specific actions that could be undertaken for reducing poverty in Zambia. In spite of strong policy commitment and increased donor support, the results of poverty reduction efforts remain disappointing.

Sustainable economic growth

Investing in agriculture will significantly help the rural community by lifting them out of poverty as indicated above. Boosting agricultural productivity has the dual function of reducing poverty and diversifying the economy and leading to sustainable economic growth. Sustainable economic growth will bring about overall  development of the economy and improve living standards. The diversification of the economy is important because it contributes to building a sustainable platform for economy growth. Standard economic theory states that sustainable economic growth takes place when an economy moves away from primary production into industrialisation and culminates in trading in services. For example, for the economy to grow sustainably over a long period, it is imperative to shift focus from exporting primary commodities to exporting manufactured goods and trading in services. This means that government revenue will come from a variety of sources leading to more jobs for the people, higher incomes and increase in export revenues (The World Bank, 2008). Consequently, the logical inference that can be made from the preceding remarks is that copper revenues should be invested in developing sectors that show potential in order to diversify export revenues and providing opportunities to withstand adverse developments in one sector without harming the whole economy. This has not taken place in Zambia in spite of the fact that on two occasions the state enjoyed significant revenue from copper deposits.

Internal factors -- Poor governance

Given the lessons from history and significant earnings from the copper boom of the late 1990s and the early 2000s, it is disappointing to note that agricultural productivity has not increased. Productivity has not increased because not enough roads have been built in remote areas, storage facilities are inadequate, input and output markets are insufficient and fertilisers and seeds are delivered late. All these failures arise out of internal factors.

Internal factors largely revolve around the question of governance. Recent electoral trends have revealed a surprising pattern. The ruling party appears to be winning the support of rural areas. What is surprising about this fact is that poverty levels are increasing in these areas. Government support from the rural electorate does not translate into improved living standards of the rural poor. Over the last eight years, the urban constituency has voted against the ruling party but poverty levels have reduced marginally, while the rural constituency that has supported the ruling party has experienced increasing poverty rates. The question can be asked: is the ruling party serious  about  reducing  poverty  in rural areas given that so little seems to be happening in terms of acting on promises made in the past about investing in the agricultural sector on which most of the rural folk depends for their livelihoods? It would seem from the above that the ruling elite appears to focus on agriculture only at election times and forget about it after they have won elections. If this were not the case then we would all observe positive developments in the agricultural sector.

While the state can do very little to change adverse external factors it can do something about internal factors. However, it has been observed many times that when negative economic conditions prevail the burden of the costs is borne by ordinary people who are in this case already poor. The political elite is rarely affected by economic crises. In fact frequently this elite loosens the proverbial belt while urging the majority to tighten theirs. Political leaders rarely show qualities or capacities to sacrifice for the sake of saving resources during tough times. Only the poor are urged to sacrifice. Instead when bad times come the political elite are quick to agitate for increases in their privileges such as personal emoluments and other benefits associated with holding top jobs in government. If this trend continues, Zambia will continue to miss opportunities to create a sound footing for development. Already two such opportunities have been missed.

Missed opportunities

The first opportunity occurred right after Independence when copper prices were relatively high. The state invested its revenue in providing social services such as education and health and building infrastructure such as roads in parts of the country where none existed such as some of the remote parts of the country. This action is laudable given that at the time of Independence many parts of the country were deprived of basic social and economic infrastructure. This scenario only lasted a decade, after which copper revenues were not sufficient to meet the desired state expenditure.

The second opportunity took place fairly recently when once again booming copper prices prevailed for several years. Even with the benefit of hindsight the State failed to take advantage of this favourable situation to do the right thing and develop the agricultural sector. Had the state taken advantage of these opportunities, poverty levels would have reduced substantially and the economy would have been placed on sound and durable platform for sustainable growth. This is the case in spite of the fact that one of the most frequently stated points in Zambia’s development literature is the underdevelopment of a hugely potential agricultural sector. Zambia possesses abundant arable land (which is largely underexploited), sufficient water resources (which could be developed for irrigation purposes) and favourable climatic conditions. Nonetheless, in spite of this potential, the sector contributes less than optimal to export revenues. Another reason why agricultural development is critical is because the majority of Zambians depend on it (GoZ, 1966). Standard economic theory suggests that a virtuous cycle can be attained when agricultural productivity improves, giving rise to increased incomes and the development of a country. It is difficult to appreciate why this is the case. As has been indicated above, government plans from independence to date are replete with statements to the effect that agriculture should be accorded high priority. However, investments in the sector have not matched the rhetoric given it in State documents.

This defies historical and empirical data which indicates that many industrialised countries developed on the back of a successful agricultural revolution (The World Bank, 2008). Even newly industrialised countries such as South Korea and Malaysia, which were poorer than Zambia at Independence, have also developed on the back of a successful agricultural sector.

Consequently, a successful poverty reduction campaign rests principally on a successful development of the potential that exists in agriculture. A successful diversification drive has huge implications on poverty reduction in a country that carries the paradox of rich nation but poor people.

In sum, a worldwide recession (in the mid 1970s), a crippling debt crisis and the cost of liberation wars meant there were precious few resources to plough into the agricultural sector or indeed to promote tourism.

Impact of the global downturn on diversification of the economy and poverty Reduction

Zambia’s budget support relies heavily on foreign earnings mainly from the sale of copper and on foreign aid. The former is directly dependent on favourable external factors such as high demand for copper and favourable prices, while the latter is an outcome of the commitment made by the rich countries to help the poorer countries. In the last few years, demand for copper has relatively been high due to high demand from China which is a big consumer of copper. With the emergence of the global recession in 2008, it has already been seen that the prices of copper has declined from a high of US$8000 to US$2770 in the first few months of 2009. China is currently facing a hostile economic climate due to the global economic downturn. This will no doubt have a negative impact on exports and imports, thereby reducing copper revenues of copper exporting countries such as Zambia. The consequences are obvious. Reduced government revenues will impact negatively on the state’s capacity to finance its development projects. One of those projects that will be affected negatively is poverty reduction, including the related projects of developing other sectors of the economy.

Prospects for poverty reduction

Recent history suggests that Zambia’s prospects for poverty reduction appear dim. The State is one of the signatories to the Millennium Development Goals (MDGs), of which poverty reduction is one of the key goals. It is stated that Zambia intends to reduce extreme poverty by half by the year 2015 (UNDP, MDG #1). It appears increasingly doubtful whether this will be attained, given Zambia’s failure to reduce poverty in the last forty years and the likelihood that the current global recession will take some time before a global upturn is observed. Consequently, it will be interesting to see how the State will keep its many pledges to the Zambian people of creating jobs, reducing poverty and diversifying the economy -- all in the context of unfavourable external conditions. If historical trends are anything to go by, it looks like instead of poverty reduction we are likely to see poverty expansion.

Conclusion

Since colonial times, Zambia has been aware of the need to diversify the economy in order to ensure sustainable development. The lessons of our history are clear. Dependency on copper, a primary and perishing commodity, is not a sustainable strategy to develop our country. This dependence is not a necessary one, it appears like a choice the country has made. Copper revenues in the past have helped finance development projects. However, in unfavourable economic conditions revenue from copper exports decline and adversely affects government efforts at reducing poverty.

Both external and internal factors have slowed down the diversification process. However, it appears that internal factors have a larger bearing on the pace of diversifying the economy than external factors, given the fact that historical and empirical evidence is available to indicate that diversification offers a better option for sustainable growth. The old diversification debate can be given new impetus by a renewed and proactive approach to implementing the good ideas found in State documents, regardless of the political risks this may pose for those in power.

Leonard Chiti, S.J.
London, England