Inclusive Growth in Zambia:

Lessons from Elsewhere

Stefan Dercon
Department for International Development (UK)
University of Oxford

What have we learned about successful

poverty reduction?
Lots of recent success e.g. in Asia but also Latin America and some African
countries.

Progress on Extreme Poverty

Numbers of Poor
($1.90 PPP 2011)
2000
1800
1600
1400

East Asia and Pacific

1200

Middle East and North Africa

1000

Latin America and the Caribbean

800

Europe and Central Asia

600

South Asia

400

Sub-Saharan Africa

200
0
1984 1987 1990 1993 1996 1999 2002 2005 2008 2010 2011 2012
3

Strong progress in health: SSA

Mortality rate, under-5 (per 1,000)

Life expectancy at birth, total (years)

300

65

250

60

200
55

150
50
100

45

50

40
1980 82

84

86

20% band

88

90

92

40% band

94

96

98

00

60% band

02

04

06

80% band

08

10

12

Median

14

1980 82

84

86

20% band

88

90

92

40% band

94

96

98

00

60% band

02

04

06

80% band

08

10

12

Median

14

What have we learned about successful

poverty reduction?
Lots of recent success e.g. in Asia but also Latin America and some African
countries.
Extreme poverty in world has dropped from 36% to 14.5% between 1990 and 2011
Also fast progress in human development (health, education)

Growth in developing countries faster than in OECD convergence, but uneven

In last 15 years: about 5.5% in developing countries versus 1.5% in OECD
For several decades in East Asia, last two decades in South Asia, last decade in Africa

Uneven Economic Convergence

GDP per capita relative to the OECD
45%

East Asia makes strong

progress towards
OECD incomes.

40%

Percentage of OECD income

35%

Latin America

30%

25%
20%

East Asia

15%
10%

South Asia

5%

Sub-Saharan Africa
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

0%

Latin America makes

progress after 2003
(debt crisis,
commodity recovery)
Slow but steady
progress in South Asia
from lowest level
Relative income fall in
Sub-Saharan Africa,
rebounding since 2001
but now stationary

SSA GDP/capita remains persistently low for most, but with

heterogeneity (Median country long-term growth 0.5% per year)
GDP per capita (const US$ 2015)
6,000

5,000

4,000

3,000

2,000

1,000

0
1980

82

84

86

88

90

20% band

92

94

40% band

96

98
60% band

00

02
80% band

04

06
Median

08

10

12

14

My questions and focus

What have we learned about growth and poverty reduction across
the world, and how it can be accelerated?
How does this generic model apply to Zambia?
What can and should we do?

What have we learned about successful

growth leading to poverty reduction?
Two key ingredients without a clear recipe on how to achieve them:
A growth process that succeeds in being inclusive of poorer groups via labour
absorption into better, higher productivity jobs and activities
Functioning social sector systems, delivering basic health, education, security and
basic protection for the poorest

Even if unclear about recipe, the necessary utensils to cook the dish:
An effective state, functioning in way that allows economic growth and foster
social sector systems
A politics in which leaders and elites are committed to growth and poverty
reduction

1. Inclusive Growth

10

Zambia: bouncing back to where it was

GDP per capita (const US$ 2015)
6,000

5,000

4,000

3,000

2,000

1,000

0
1980

82

84

86

20% band

88

90
40% band

92

94

96

60% band

98

00

02

80% band

04

06
Median

08

10

12

Zambia

14

Growth experience: regaining lost ground

GDP per capita (const 2015 US$)
1800
1600

Zimbabwe
Mozambique
Tanzania
Malawi
Zambia
Uganda

1400
1200

1000
800
600
400

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016

200

Source: World Economic Outlook, IMF

Decomposing 7.3% annual growth (00-13)

Industrial Production Index

Annualized contribution to growth 2000-13

-0.5%

0.0%

0.5%

1.0%

1.5%

Non- metallic Mineral

Products

300

Food, Beverages &

Tobacco

Community, Social and Personal

Wholesale and Retail trade

250

Wood & Wood Products

Construction
Mining and Quarrying

200

Paper & Paper Products

Transport, Storage and

Manufacturing

Electricity

150

Real Estate and Business services

Financial Intermediaries and

Fabricated Metal
Products

100

Restaurants, Bars and Hotels

Agriculture, Forestry and Fishing
Adjustments (FISIM,taxes)

Chemicals, Rubbers &

Plastics

50
0

Basic Metal Industries

2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Electricity, Gas and Water

Textile, Clothing &

Leather

13

How did Zambia achieve this growth?

Descriptively? 7.3% growth pa in 2000-13 years; decomposition

Mining 1% p.a. on average (i.e contributing 1/7th of total growth)

Construction +1.1%
Trade +1.6%
Transport +0.9%
Personal/community/social services +1.4,
Business services 0.4%
Agriculture (crops and livestock) -0.1% (below share in GDP)
Manufacturing: +0.5% Functionally? Exports-led leading to non-tradables boom

Export revenue from mining plus appreciation leading to import boom

Import boom pushing services to handle them (non-tradables) transport, govt.
services, trade
construction boom from asset seeking, plus govt officials earnings (non-tradables)
Little tourism or agriculture (a little better most recently)
Modest (tradable) manufacturing (import substituting)

14

Classic reallocation to non-tradables

Zambia Real Effective Exchange Rate, CPI
(base year 2010 = 100)
120.00
100.00

80.00
60.00
40.00

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

0.00

1990

20.00

70% appreciation real exchange

rate 2000-2013
Encouraging allocation to nontradables (construction, services,
retail, )
Strong growth of consumption
cities
[welcome but only very partial
reversal with recent
depreciation]
15

Theory of growth and inclusion

Growth theory and empirics: focus on misallocation within and across sectors
(Klenow, Hsieh)
Growth as reallocation as moving from less productive to more productive
activities within and across sectors; dual economy structural transformation
If more reallocation of (low skilled) labour, the faster poverty reduction (e.g. Eswaran
and Kotwal, 1991) (as the poor have but their labour to sell (Marx)).

(Probably) broadly consistent with East-Asian experience:

growth in urban, tradable manufacturing, absorbing labour from informal and rural
sector
fast poverty reduction driven via expanding job opportunities in (production) cities

Note prediction (Lewis): not necessarily fast reduction of poverty in urban

areas (not clear what happens to real wages), but definitely reduction of rural
poverty in process
Consistent with e.g. China evidence or more recently Bangladesh

16

Zambia: theory and experience

In natural resource-rich economies:
productive high return sector is mining not labour-intensive
Its very high value export revenue makes other potentially high productivity
tradables uncompetitive, in favour of non-tradables
Incentives for urban growth in non-tradables servicing those that capture the
rents
creation of consumption rather than production cities
Risks of high inequality and stagnating poverty
$1.90 headcount
poverty

GINI

Stunting (%)

Malawi

71%

0.46

48%

Mozambique

69%

0.69

46%

Tanzania

47%

0.38

35%

Uganda

33%

0.56

34%

Zambia

61%

0.69

40-48%

17

How to get growth? Some ingredients

Reallocation is about investment, responding to opportunities
Investment is about long(ish) time horizons, about risk as well as trust
Role of macroeconomic stability

18

Transition to Macroeconomic Stability (SSA)

Inflation in Sub-Saharan Africa
100
90
80
70
60

50
40
30
20
10
0
1980

82

84

86
20% band

88

90

92

40% band

94

96
60% band

98

00

02

80% band

04

06
Median

08

10
Zambia

12

14

Substantial
improvements in
macroeconomic
stability
In 1987 and 1991, the
worst 10% of countries
had inflation over 100%
In 2014, 90% of
countries had inflation
under 10%.
Zambia had improved
relative to peers but
worsened since 2014
Not due to wrong
monetary policy but
due to absent fiscal
commitment

How to get growth? Some ingredients

Reallocation is about investment
Investment is about long(ish) time horizons, about risk as well as trust
Role of macroeconomic stability

No credibility for any long-term investor if long-term stability is not

restored
Needs strong commitment or it will only be temporary
IMF programme discussions offer opportunity
20

How to get growth? Some ingredients

Reallocation is about investment with structural change
From lower to higher productive activities, within and across sectors

Very hard due natural resource presence

Urgent need to diversify
Which sectors have potential?

21

Role of agriculture? Growth lens

Falllacy 1: Long-standing view: in poor settings, growth must start with
agriculture
Especially smallholder agriculture
Not quite consistent with evidence (Gollin, 2014)

Fallacy 2: keeping food cheap is good for growth

Feeding, fuelling growth so favour staple food in production
But growth effect not present in small open economy

Fallacies led to:

Producer subsidies via FISP (as if maize would be growth engine too) (which leak to
outside country)
Long-standing huge consumer subsidies for maize (which leak to non-poor)
Turning maize into non-tradable (export bans), but exacerbates incentives against
tradables in this economy, deeply costly to growth
22

Role of agriculture? Growth lens (2)

Lens of modern growth theory meets structural transformation: agriculture
will have huge role
Within agriculture scope to reallocate to more productive activities (commercial,
export, high value crops) (Udry, 2012)

How?
Usual obsession with production subsidies (inputs, fuel) misplaced
Move into higher return crops, commercial agriculture

What happens elsewhere IS crucially important for agriculture

demand linkages matter a lot, e.g. Eswaran and Kotwal, 1993: demand-led growth for
agriculture is ; who will buy the agricultural development
value chain development not from supply side, but from demand side : buyers are key
(not massive input subsidies)
23

Role of agriculture? The poverty reduction lens (3)

A focus on agriculture and smallholder can be driven by concern for the poor
(even if not necessarily best for growth)
As Agriculture by far largest employer of the poor
As Smallholders uses labour intensively

IF you can get growth in agriculture, it is really good for poverty reduction
but getting growth in agriculture across poor smallholders is hard and likely to
be costly
is it the best way to get the large growth required to bring poverty down? Definitely not
always
Very hard in low population density rural sector
Not an issue of supply but demand

note of warning: reallocation and transformation will be slow and messy

process
Reallocation process will be slow so in poorest countries, there will be huge numbers
of peasants for a long time to come, probably requiring our attention
24
Reallocation within sector key as well for them as move into more profitable activities

The role of agriculture: Zambia?

Massive growth potential but.
Obsessive focus on maize (grown by smallholders and politically
important)
Huge FISP, FRA distortion
Given recent policy, no incentives for commercial farmers to grow or private
traders to store
HUGE missallocation

Meanwhile: reallocation happens all the time

Re-emergence of lots of private higher value chains: dynamic agriculture
Commercial agriculture opportunities, with potential links

But not quite in ways that provide sufficient (demand) links back to
poorer smallholders
Limited link to poverty reduction requires our attention but smarter than
has been the case over decades in Zambia

25

Other sources of diversification?

Depreciation and low commodity prices opportunity to rethink?
Dont wait for supercycle to come back!
Move to tradeables? (substituting imports or supplying regional
markets)
Move to production cities?
Generally relatively benign business climate can always be
improved
Macro-stability crucial to bring cost of capital down (and get banks to
focus on the economy rather than Treasury Bills rents)
Energy, infrastructure focused on production, less on consumption
Will require special political commitment
26

2. Effective state

27

Some ingredients
Effective state not really about market versus the state,

but what is the state for?

In Africa, lots of images of the state

28

Many claim they want to be Tigers

29

Predatory States
States seem to be designed to extract and plunder
from people and the economy
Like a Tiger Fish: living from eating little fish

Predatory State par excellence: DRC

Mobutu the Master:
Article 15 of the Constitution Dbrouillez-vous (get it while you can)
If you must steal, then steal a little bit and leave the rest for the nation.
Current tax and regulation:
-DRC: lots of taxes (and rules).
coffee exports from Matadi need 57 signatures and 7 stamps;
goods travel on the Congo river 17 permissions;
-VAT: change business taxation by 2014 more refunds than receipts

Failing States
Violent
Eating the scraps; scavenging economies
States or regions in conflict Somalia,
South Sudan,

(Illiberal) State-Builders
A class of countries with leadership with
genuine ambitions in state building and
development

Roaring lion
Often emerged from victory in conflict, stable
with monopoly of violence
Modernist, developmentalist ideology, beyond
redistributive to particular group:
Strong structures, military or political, strong
leaders
Quite effective in delivery of development
Legitimacy seeking through development,
even though no question of their authority

Neo-Patrimonial States
Redistributive state: resources to followers for
loyalty
Consistent with democratic elections
Mix of modern and patrimonial/personalised
ship not seeking to go anywhere but simply
staying afloat (temp alliances, ethnic coalitions
and manipulation of electoral systems)
a bit like a floating hippo: pretty stable, seemingly
too big, unclear what its aim is but potentially
pretty dangerous too
But no interest in change, in transformation but just
reproduction of relative dysfunctionality (even
predatory) behaviours
not effective states, but marginal improvements
possible ---

? Zambia
Choose your animal but it may look like a (relatively benign) hippo;
so dont treat it like a lion nor a predator
Zambia: stable, even politically, with elections, freedom of expression
But state distracted by redistribution of rents
Serving primarily (urban) core group of beneficiaries officials and formal
sector wage earners
general subsidies (fuel, energy, food and inputs) versus targeted to the
poorest

Unable and Unwilling to act

State of low capacity with little motivation
Little incentive to act, to implement
Passive, distracted state in economy
35

3. Politics aligned with growth

36

A politics in which leaders and elites are committed to

growth and poverty reduction?
Require serious political commitment of leaders and elite

Goes beyond state-led or market-led

Beyond elections
Examples in East-Asia, China, but also Ethiopia and Rwanda
Example in Bangladesh

But extremely difficult in countries with lots of natural resources:

Fundamental governance challenge: why try to get growth if financing elite is
easy in other ways -- Nigeria, DRC, Angola
Zambia more benign but still failing to turn power into commitment
37

A politics in which leaders and elites are committed to growth

and poverty reduction: and how to signal it?
How to build that confidence and trust? Commitment devices.

Tying the hand of policy makers. E.g. independence of central bank

Requiring fiscal discipline, as well as convincing public financial management
Clear commitment to rational, transparent, rule-based policy making say in
staple food market!

a mature state is one that takes only on what it can handle properly,
given its own weaknesses (no hippo in lions clothes)
In Zambia: It is the ideal time to signal in consistent ways
that state will act in committed way to growth and poverty reduction,
but in a coherent and realistic way,
With realism and recognition of its limitations in implementation
38

So can Zambia do it?

There are opportunities here, and already being taken:

Services even not perfect, shows capabilities to run and expand
business
Agriculture, outside maize
Some manufacturing, with opportunities to substitute imports
Regional trade opportunities modest for now, but
competitiveness has increased
Tourism
Needs for energy investments with huge opportunities
Scope for FDI in all these sectors

Within the context of continuing substantial yearly rents

from natural resources
39

Are Zambias policy makers ready to choose this path?

Recent development plan has the ambition
But is there the commitment to ensure it can even start by
restoring macro stability?
Great opportunity: to reset structure of how the state supports:
Away from non-discriminatory subsidies
More pro-poor, more pro-production
Away from just public sector job creation, at huge cost, to a
slimmer, supportive state that does not crowd out capital
40

So can Zambia do it? And can we help?

Scope for a political elite to signal much stronger commitment to
achieve better state capacity
A real opportunity now: signal via IMF programme but also a
commitment to growth rather than rent distribution to a relatively
small elite
What can donors do here?
Be supportive, and understanding: delivering a commitment to
fiscal consolidation (given huge subsidies and wage bill part) will
be very difficult
Smart, careful support understand the political economy
And help them to be willing to be a state mature enough to know
its limitations

41