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«2015 Bilateral debt Multilateral 8000 7000 poverty 6000 goals 5000 sustainability 4000 3000 macroeconomic millennium 2000 1000 0 1995 1996 1997 1998 ...»

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To adjust for the above flaw, we re-estimate the extreme poverty reduction entailed by the annual average GDP growth rate scenarios of 9 and 10 percent. We also use the same elasticity and population growth rate assumptions. The difference with McCulloch et al is in the baseline poverty levels as in this case we assume that extreme poverty in the base year (2004 in this case) was 53 percent, in accordance with LCMS IV.

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70 70 60 60 50 50 2 40 40 30 30 20 20 10 1991 1993 1996 1998 2004 1991 1993 1996 1998 2003 2004

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40 30 20 1991 1993 1996 1998 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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The foregoing is simply to illustrate that the key to reducing poverty in Zambia lies in increasing the responsiveness (elasticity) of poverty reduction to growth by focusing developmental efforts on pro-poor economic activity. That is, by ensuring that growth takes place in sectors and areas such as in agriculture and in the informal sector where the poor are able to participate, using their labour to earn higher incomes. A higher average elasticity of extreme poverty to GDP growth would definitely paint a less gloomy 2 picture about Zambia’s prospects for meeting goal number 1 of the MDGs17.

As a second illustration we draw on assessing various HIV/AIDS cost estimates.

The MDGs cost estimate of US$99.4 million per annum in Mphuka (2005) – though significantly higher than that entailed in the FNDP financing requirement estimates of US$ 45.8 million in total or US$9.2 million per year on average over the FNDP period – is actually an underestimate of the anticipated cost of mounting an effective, MDGs consistent HIV/AIDS response as worked out by the national authority (NAC) in the National HIV/AIDS Strategic Framework (ZASF, 2006-2010).

These few illustrations simply re-enforce earlier arguments that the widely held understanding on the indicative financing requirements for developmental and poverty programs in the FNDP as well as many of the cost estimates of the MDGs are probably significantly less than the true resource requirements for development and poverty reduction in Zambia. The resources actually needed to achieve the MDGs are likely to far exceed those suggested in national and international operational plans. Unfortunately, it is not possible to estimate by what amount the FNDP amounts fall short of MDG requirements. This is because, as highlighted above, the true costs of meeting the MDGs in Zambia have not been fully established. Mphuka (2005) presents somewhat modest costs, which most likely underestimate the true costs of MDG requirements.

However, it must be recognized that although the FNDP does not appear to be fully consistent with the MDGs in terms of ambition, it nevertheless sets out most of its core spending priorities as MDG-consistent investment intentions that will support progress against poverty reduction in Zambia if the assumptions of the FNDP hold.

17 Clearly more work in the area of understanding the poverty-growth linkages needs to be done

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3 Zambia’s Recent Macroeconomic Context The macroeconomic context of poverty alleviation and development programs gives useful insight into the feasibility of attaining the goals and target of the various efforts.

It speaks to the economic environment in which growth, poverty reduction and development is expected to take place. This section therefore describes the macroeconomic context of Zambia’s past and forward-looking development strategies and plans.

3.1 Size, Growth and Growth Prospects Zambia has a vast geographical spread, covering an expanse of 753,000 square kilometres. It has a total population of about 10.8 million people, and an abundance of natural and environmental resources, including an estimated 40 percent of the southern African ground water resources, substantial copper reserves and large tracts of arable land. In spite of its vast potential, Zambia can be described as a least developed, small, open economy. In value terms, its GDP – at constant 1994 prices – was estimated at K3,337 billion (US$821.2 million) in 2006 compared to K3,156 billion (US$789.0 million) in

2005. In current prices, 2006 GDP was estimated at K38,586 billion or US$9496.2 million compared to K 32,456 billion or US$ 8114.0 million in 2005. Preliminary observations suggest that the Zambian economy continued to experience positive, strong growth in 2006.

The CSO’s 2007 estimates of GDP based on data that runs mostly up to September 2006 show that the economy grew by 5.8 percent in 2006. For a sustained period of eight years, the growth performance of the Zambian economy has been favourable, with an average real GDP growth rate of 4.3 percent between 1999 (when positive growth first registered) to 2006. Between 2001 and 2006, the average real GDP growth rate was

4.7 percent per year while over 2003-2006, real GDP grow at an average 5.4 percent per year. This shows that average growth performance has been growing increasingly strong over time.

In the empirical literature on growth prospects for Zambia, many growth scenarios have been given, each based on a separate set of assumptions and each predicting a different growth path. Ultimately, there have been many views about the overall growth outlook for the country in the future, but with little consensus on which projected outcomes are more likely or more plausible.

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6 % 3 3 0


-6 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* 2007 2008 2009 2010 For instance in a debt sustainability analysis publication in 2005 (IMF, 2005), the IMF predicted long-term GDP growth rates for Zambia to be steady at 5 percent per year during 2001-2004, 2005-2013 and 2014-2023, with underlying assumptions of accompanying restrictive fiscal and monetary policies during the long-term period. Weeks and McKinley (2006) have challenged the IMF projections as being too optimistic and dubious compared to the economic record prior to the country’s HIPC Completion Point. Under similar policies to those assumed by the IMF, the actual average growth rate of 4.7 percent for 2000-2004 reported in Weeks and McKinley (2006) (or similarly, of 4.7 percent for 2000-2006 (see above)) was slightly less than the IMF prediction. For a historic perspective it is easy to appreciate that the IMF estimated GDP growth rates are unusually high and unprecedented (especially on a sustained basis) compared to the country’s performance of the previous decade.

However, given that Zambia has sustained positive GDP growth for about eight years now and maintained this growth at above five percent for four year straight while edging towards six percent in the final year (2006), a lesson here is perhaps that historical performance trends are not very reliable indicators of future outturns. This is more so for countries under reform and in transition that are under significant internal and external pressures to show dramatic growth results. It is clearly hard to predict what the growth outturns will be for Zambia over the medium- to long-term. However, from the

forgoing two things are clear:

• Firstly, a five percent growth rate is less than the seven percent assumed in the FNDP and required to fulfill the poverty reduction and developmental aspirations outlined therein;

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• Secondly, as highlighted earlier, five percent GDP growth is far less than the 9-10 percent or higher growth rate, which is required for meeting the MDG on extreme poverty reduction.

A fundamental aspect reflected in the FNDP and reiterated earlier in this paper concerns the responsiveness (or elasticity) of poverty to growth. The evidence seems to suggest that the links between growth and poverty are extremely weak so that whatever growth is being realized in the economy is not readily translated into poverty reduction.

The poor are excluded from using their labour to contribute to economic activity and 3 therefore to their well-being. A discussion on the lacking linkages between employment (or economic activity) areas of the poor and contributions to GDP is briefly followed up in Section 3.4. The section also reinforces from a microeconomic perspective the widely known fact that for a long time Zambia has been characterized by high income inequality, with a Gini Coefficient of about 57 percent in 2002-2003 (CSO, 2005).

3.2 Key Macroeconomic Indicators The macroeconomic environment underpinning the above economic activity remained stable and largely favourable in 2005, with improvements in inflation, a decline in interest rates and a slight accumulation of international reserves. Performance of the fiscal budget also improved, though somewhat less dramatically – with a marginal (one percentage point) reduction in domestic borrowing (see Table 3.1).

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Source: MOFNP (2006c), other MOFNP data and IMF documents The PRSP progress report observes that spending on poverty reduction programs was

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steadily scaled up from 2002 onwards. Preliminary macroeconomic indictors for 2006 also looked largely favourable, and many commentators have argued that stabilization is largely on track for the country.

3.3 Composition of the Economy In terms of the economic composition, for a long time Zambia tended to engage more in primary sector activities, but since the 1990s, the services sector has become the largest source of economic activity (see Figure 3.2).

In 2005, the services sector made the largest contribution to GDP, accounting for 53 3 percent of the total. Within the services industry wholesale and retail services followed by real estate provided the most dominant contributions to total economic activity. The services sector was followed by the primary sector, wherein agricultural activities dominated mining in contributing to sectoral GDP. In the secondary sector, manufacturing dominated the contributions to GDP.

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Source: Authors’ own construction using MOFNP data 53% 23% Following on the broad economic composition highlighted above, more details of Zambia’s economic structure are presented in Table 3.2 by economic activity. Among the main highlights, the agriculture, forestry and fishing sector, which had recorded a decline of 0.6 percent in 2005, was anticipated to grow by 2.4 percent in 2006 mainly driven by good rains and therefore good harvest. The favourable agriculture outturn was important for keeping inflation low through lowered food price changes, and also for keeping a large number of people receiving some benefits from gainful employment.

Growth in mining (and quarrying) was expected to be 11.8 percent compared to

29 Zambia: Debt Strategies to Meet the Millennium Development Goals

a growth of 7.9 percent in 2005. The impressive outturns in mining were fostered by significant copper production driven by substantial increases in international copper prices in 2004, 2005 and 2006.

Significant growth in the economy was expected to emanate from transport and communications, hotels, bars and restaurants, community, social and personal and construction sectors.

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*Preliminary (up to third quarter 2006) Source: CSO 2007 In terms of industry shares of GDP at constant 1994 prices, wholesale and retail trade remained the industry with the highest share at 18.3 percent in 2006. This was followed by the agriculture, forestry and fishing sector at 14.2 percent and manufacturing at

10.6 percent. Construction and real estate and business services had the fourth largest shares at 9.1 percent each. Mining and quarrying had the fifth largest contribution at

8.6 percent.

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*Preliminary (up to third quarter 2006) Source: CSO 2007 Although agriculture, the mainstay economic activity of many poor people in Zambia, accounts for a very large proportion of economic activity, it is clear from the ensuing discussion below that the sector has not worked for the poor in reality.

3.4 Employment This part of the paper seeks to describe how the Zambian labour force has been employed in generating economic outputs and how labour has been rewarded (or not) in terms of per capita shares of economic activity and well-being.

Table 3.4 below highlights the sectoral employment outturns and per capita contributions of the various sectors (or industries) to GDP in Zambia based on the numbers of persons employed in each sector.

The table is based on 2003 LCMS data (from CSO), which coincide with counterpart 2003 data from CSO (2007) on GDP shares. The main intention of the table is to highlight the distribution and equity of economic activity in Zambia.

The majority (about 72 percent) of employed persons in Zambia are engaged in the

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Note: 2003 exchange rate: K 4,607 = US$ 1 Source: Authors’ own construction using CSO (2004) (LCMS III) and CSO (2007) data Although the above per capita contribution from agriculture is severely low relative to other sectors, the statistics actually hide further gross intra-sectoral inequalities. In 2003,

98.3 percent of the labour force in agriculture consisted of small-scale farmers while only 1.7 percent comprised of medium- and large-scale farmers. Typically, the latter groups earn significantly more than small-scale farmers and are therefore able to make a

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export-led growth will not be meaningful if the poor are excluded from supplying their outputs to export markets. Diversification of export orientation to include other sectors such as small-scale agriculture in the export equation is a necessary step that has not taken place in Zambia. Efforts at export diversification have at best been pursued in a piecemeal fashion, with few if any sustained tangible results.

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