By Joseph Simumba and Caesar Cheelo
ZAMBIA IS STRUGGLING to accelerate economic diversification. This challenge calls for serious policy action as there are now only 13 years to go before the due date for the Zambia Vision 2030. Economic output, employment and foreign trade are all concentrated among a few sectors and over a narrow range of products and firms.
It is imperative that the country should accelerate the process of expanding the sources, range, and markets of its goods and services and shift output and employment composition into economic sectors that are resilient to external shocks.
The 2017 National Budget has several measures to influence economic diversification that fall into three broad categories:
- The first relates to measures that directly protect domestic industry using a five percent surtax levied on imported items that are also locally produced and subjecting semi-processed edible oils imports to customs duty.
- The second category has measures that safeguard domestic value addition by discouraging exporting of raw materials. It imposes duty on exports of unprocessed and semi-processed timber products and maize.
- The last set of measures aims to boost availability of affordable long-term capital to industries. It includes the US$55.4 million Cashew Nut Infrastructure Programme in Western Province, US$50 million allocation for credit expansion among Small and Medium Enterprises (SMEs) and the introduction of the K20 million agriculture and industrial credit guarantee scheme. Government also announced its commitment to support the development of the newly created Kafue Iron and Steel Economic Zone although there is no specific financial allocation. Producers in aquaculture can now enjoy duty-free imports on equipment until 2019. Fittings used for irrigation and machinery used in lifting, handling and loading in the shoe industry can also be imported duty-free.
This menu paints the picture of economic diversification in the 2017 budget. The count of measures and the corresponding value has increased more substantially than in 2016. However, the flavour of economic diversification has not changed; the 2017 budget still champions diversification that heavily emphasises agriculture, mining and forestry with slight industrial manufacturing. It is extremely weak on laying a foundation for heavy industrial production, which has failed to recover since privatisation in the early 1990s.
The failure to develop a class of heavy industries and restructure manufacturing towards catching up in production of machinery, electronics and transport equipment is responsible for excessive dependence on imported manufactures that are draining foreign currency reserves and negatively affecting the trade balance. Coupled with imports of petroleum and heavy oils, chemicals, pharmaceuticals and to a lesser extent iron and steel products, they drain tenfold the value of foreign currency earned on exports of agriculture and agro-processed food and beverages.
Therefore, the first step to accelerate economic diversification requires restructuring manufacturing towards the creation of large scale, capital and technology intensive industries. It’s this type of strong manufacturing that can buttress the discovery, creation and building of products that are sold in the region and all over the world. In manufacturing, size-economics of scale matters and it is the crucial factor for value and industrial resilience.
For example, the study by Nolan, P. (1996) "Large firms and industrial reform in former planned economies: the case of China." in the Cambridge Journal of Economics shows that China formed a ‘national team’ of large enterprises that plugged it into international competition in the 1990s. The team had eight firms in electricity generation, three in coal mining, six in automobiles, ten in electronics, eight in iron and steel, fourteen in machinery, seven in chemicals, five each in construction materials, transport, and pharmaceuticals and another six in aerospace . AVIC International, which is constructing several roads in Zambia, is a clear demonstration of this initiative.
The World Bank equally recounts how the weight of “export superstars”, that is the big one percent companies that export, individually shape the volume and patterns of trade which are significant determinants of trade balance performance and hence foreign currency reserves.
Therefore, Government needs to scale up budgetary appropriations towards creation of heavy manufacturing for machinery and components used in agro-processing and agro-extraction, and engineering and foundry for metal casting and wire processing so as to add value to agriculture and mining. This is a sure way to plug local manufacturing into high value and resilient regional and global value chains which can overcome adverse swings in prices of metals and maize.
It is undeniable that a great challenge for the budget is the limitation on funds. Industrial reform is also likely to face deeper challenges than those witnessed by recent catch-ups like South Korea, Malaysia, Singapore, Thailand and China. However, the opportunities’ offered by emerging arrangements under the Public and Private Partnerships are equally massive and need effective exploitation.
Government basically needs to establish better balance between creating heavy industries and the demand for investment in infrastructure including transport and ICT, support to SMEs and initiatives to stimulate further private sector investment. Of course, big industries require healthy, productive workers and good jobs begin with a good education that also stimulates innovation.