1) Zambia faces several key structural issues that constrain its economic growth including overdependence on copper mining, low agricultural productivity, inadequate infrastructure, poor access to credit, and high unemployment. 2) To address these challenges, Zambia is pursuing policies to promote investment and diversification through special economic zones, incentives for foreign investment, and liberalizing financial markets. 3) However, Zambia still faces headwinds including falling copper prices, rising debt levels, and a challenging macroeconomic environment that threaten progress toward its goal of becoming a prosperous middle-income country by 2030.

1. Structural Issues in the Zambian Economy
Extract 5
Extract 5 is where the 20 mark OCR F585
discussion question will come from
Since the stimulus material was written – the macroeconomic climate for Zambia has
worsened considerably – GDP growth is falling, inflation is rising and the currency is declining.

2. OCR F585 June 2016 Country Focus: Zambia
• Zambia is a factor-driven
developing country and has
enjoyed strong GDP growth in
recent years
• Has it made similar human
development progress?
• Is their growth and development
path sustainable?
• Will the Zambian economy get
through a difficult period of
falling copper prices and rising
inflation?
• How best can Zambia benefit
from regional and global trade?
• How can it diversify away from
high dependence on copper?

3. World Bank Report on Zambia (June 2015)
• “With strong economic
growth in the last decade
traceable to significant
investments in Zambia’s
copper mining sector,
Zambia has now reached
lower– middle-income
status.”
• “Despite this income
growth, however, more
than 60 percent of its
people live below the
national poverty line.”
• “In addition, a century of
mining has imposed
environmental and public
health costs on the
country and its people.”
This World Bank quote is a useful reminder of some of
the externalities from countries experiencing rapid
economic growth. Zambia is a good example of this.

4. Zambia and Malawi – Real GDP per capita (PPP)
The good news for Zambia is that a period of
sustained economic growth has led to significant
increases in their real GDP per capita (PPP
adjusted). In 2008, Zambia overtook the Sub
Saharan average and is now classified as a lower
middle income country.
Malawi on the other hand has been left behind;
real incomes per head have increased at a slower
rate and it remains one of the poorest countries
on the planet with very low HDI scores.

5. Per Capita Incomes across the African Continent
Zambia

6. Slower Growth Limits Gains in the Standard of Living
8.4
7.8
9.2
10.3
6.4
6.8 6.7
5.6
4.3
4.0
5.4
4.8
6.1
7.0
3.1
3.4 3.3
2.2
0.9
0.6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Annual growth of real GDP and real GDP per capita for Zambia (Source
IMF World Economic Outlook, data for 2016 is forecast (November 2015)
Real GDP Growth Real GDP Per Capita Growth
Zambian government’s GDP
growth target = 7% pa

7. How many of these growth limiters apply to Zambia?
Infrastructure Gaps
Primary Export
Dependency
Macroeconomic
Instability
Conflict and
Corruption
Human Resource
Gaps
Insufficient Savings
& High Debt
Natural Capital
Depletion
Rising Income
Inequality

8. Extract 5: What are key structural issues facing Zambia?
• Structural issues refer to underlying weaknesses on the supply-side of the
Zambian economy: Here are some of the supply-side deficiencies:
1. Low capital investment as a share of GDP and falling private sector
investment – in part the result of changing corporation tax and royalty
regimes and – more recently – the global slump in copper/cobalt prices
2. Heavy dependence on copper mining – volatile X revenues and investment
3. Low productivity agriculture – still employing over 60% of workforce
4. High rates of unemployment & under-employment (a dual labour market)
5. Severe infrastructure weaknesses – especially power supplies and poor
transport networks which increase the costs of doing business
6. Inadequate financial services industry – poor & expensive access to credit
7. High levels of income and wealth inequality (high Gini coefficient = 0.57)
8. High drop-out rate for secondary education + poor quality of teaching
9. Zambian manufacturing industry is shrinking (an example of premature
de-industrialisation associated with the natural resource curse)
10. Outward migration of some skilled, younger workers – estimated to be
1.5% of the Zambian population in 2011 – many go to RSA, Botswana & UK

9. Zambia – A Case Study in Poor Access to Credit
Poor access to
credit
Poor
infrastructure
Excessive
bureaucracy
Regulations
and licensing
requirements
Supply-Side
Constraints
• Poor Access to Credit
• Less than 38% of the Zambian adult
population have access to any form
of financial service
• Lending to the private sector is low
at 12% of GDP in 2013, below the
Sub-Saharan average of 21%
• Interest rates on loans are high
• Businesses seeking credit to expand
are limited in their access to loans
• Few households or businesses have
any form of insurance
• Many rely on informal lenders which
exploit and are very high risk
• The majority of households do not
save or have formal savings
accounts with banks

10. Zambia – Poor Access to Credit
• While 36% of adults in
Zambia’s urban areas have
a bank account, only 17%
in rural areas have one
• In 2013 there were just
360 bank branches in
Zambia
• The number of ATM
machines has increased
from 537 in 2011 to 744 in
2013
• Only 5% of adult Zambians
who own mobile phones
use them for financial
transactions, far less than
the average of 16% in Sub-
Saharan Africa
Zambia is behind Kenya in expanding access to
financial services through mobile payment systems.
Micro finance may help to deepen the available of
credit available for households, farmers and other
small-scale producers in the Zambian economy.

11. Supply-Side Policies to Address Poor Access to Credit
• World Bank Report (2014)
• “Financial inclusion has
major effects on people’s
lives. It helps them save,
borrow, reduce costs of
transactions, and manage
shocks. There is growing
empirical evidence that
financial inclusion is
important for economic
development and poverty
reduction, and that the
poor benefit considerably
from basic payment and
savings services.”
Investment in basic financial
literacy rates
Encourage micro-finance
lenders
Incentives for foreign
investment from overseas
banks
Allow Zambia Post to provide
financial services – especially
in rural areas

12. Zambia suffers from Chronic Infrastructure Gaps
Poor access to
credit
Poor
infrastructure
Excessive
bureaucracy
Regulations
and licensing
requirements
Supply-Side
Constraints
• Landlocked Zambia scores poorly in the
infrastructure rankings published as part of
the Global Competitiveness Index
• Quality of overall infrastructure 93/140
• Quality of roads 81/140
• Quality of railroad 80/140
• Quality of port infrastructure 131/140
• Quality of air transport 112/140
• Electricity and telephony 119/140
• 90% of Zambia’s power comes from hydro-
electric plants making the country especially
vulnerable to drought
• To earn foreign exchange, Zambia exports
much of it’s own power from hydro-electric
power – this damages electricity supply to the
farming industry
• Copper mines absorb much available energy
supply. There are frequent power outages
affecting homes & businesses
• Much copper output is transported on poor
roads which adds to costs and hurts profits

13. Other Constraints facing the Zambian Economy
High youth unemployment
and huge under-
employment problem
High extreme poverty
levels especially in rural
areas (>80% on less than
$1.25 per day PPP)
Low agricultural
productivity – much
subsistence farming
High public sector wages
compared to the private
sector
Persistent fuel shortages
and reliance on fuel
subsidies
Volatile currency – this
adds to investor risk and
may limit FDI inflows

14. Extract 5: Supply-Side Polices to Promote Growth
• The aim of the government is – by 2030 – to become a prosperous
middle-income nation. The history of other many resource-rich
countries suggests this will not happen unless Zambia successfully
diversifies the economy and achieves more inclusive growth
• Policies aim to increase capacity, competitiveness and capabilities
1. Special Economic Zones (currently two – low import tariffs and 5-
year relief from corporation tax and taxes on dividends)
2. Incentives to attract inward investment especially in power and
transport and telecoms infrastructure and in commercial farming
3. Liberalizing financial markets to encourage more competition in
basic financial services / attracting micro-finance organisations
4. Reductions in the state minimum wage (it is 3 times the private sector
min wage) to cut state spending and encourage private employment
5. More efficient tax collection systems to fund an long-run increase in
education spending especially in rural areas / remote communities

15. Investment as a % of GDP for the Zambian Economy
One feature of Zambia shown in this chart is the significantly higher level of capital investment as a share
of GDP contrasted with Sub-Saharan Africa and the continent’s largest economy, South Africa.
Gross Capital Investment in Zambia (% of GDP)
2013 2014 2015
Gross Investment 33.6 31.1 31.7
Government Investment 6.3 5.4 5.9
Private Sector Investment 27.3 25.7 25.8
Source: IMF (2015 is a forecast)

16. Employment Structure for Zambia
Economic activity Employment by sector (% of total employment)
1975 1991 2000 2005 2010 2013
Agriculture n/a 65 72.5 72.2 65.5 55.3
Mining & utilities n/a 2.7 2.2 1.8 2.4 2.3
Manufacturing n/a 10.1 3.9 4 3.8 4.1
Construction n/a 0.9 1 1.3 2.5 3.7
Wholesale, retail,
hotels
n/a 10 10.3 10.2 11.9 13.7
Transport, storage,
communications
n/a 2.3 2 2.1 2.7 3.5
Other n/a 8.9 8 8.4 11.2 17.5
Total n/a 100 100 100 100 100

17. Most problematic factors for doing business (Zambia)
This chart is taken from the 2015-16 World Economic Forum
Competitiveness Report and ranks the biggest barriers to doing business in
the Zambian economy. Low access to credit is easily the dominant factor.

18. Zambia – Ease of Doing Business Rankings (2014)
Source: World Bank (2015)
Ranking within Sub Saharan Africa
Economy
Ease of Doing Business
Rank (Global)
Starting a
Business
Getting
Electricity
Getting
Credit
Trading Across
Borders
Enforcing
Contracts
Mauritius 28 3 1 3 1 2
South Africa 43 7 27 5 5 4
Rwanda 46 15 4 1 33 9
Ghana 70 12 6 3 11 16
Botswana 74 26 11 7 26 8
Seychelles 85 18 16 40 2 18
Namibia 88 28 5 7 17 7
Swaziland 110 25 22 7 13 41
Zambia 111 8 14 2 41 17
Tanzania 131 17 9 32 18 3
Ethiopia 132 33 8 38 35 6
Kenya 136 24 23 15 25 25
Malawi 164 29 41 32 37 32
One of the policy priorities for the Zambian government is to improve
the country’s rankings for ease of doing business. Zambia is ranked
only 9th in Sub Saharan Africa using these criteria and 111th globally.

19. Zambia – Special Economic Zones
• A Special Economic Zone (SEZ) is an area within a country
that has special economic treatment and policies, for
example lower corporation tax rates, better access to
economic advisors, and more flexible labour laws.
• Usually, firms that operate in an SEZ are able to produce at
a lower cost than firms elsewhere in a country, therefore
gaining a competitive advantage.
• The general aims of SEZs are to increase employment,
increase capital investment and increase trade
• China is probably the best-known example of using SEZs to
stimulate economic growth and development

20. Zambia – Special Economic Zones
• Zambia currently has two SEZs, both developed in
partnership with China’s imaginatively-named (state-
owned enterprise or SOE) China Non-Ferrous Metal
Mining Corporation.
• One, near the capital city Lusaka, specializes in producing
clothing, food and electronics.
• The other is found in Zambia’s copper-belt, and
unsurprisingly specializes in copper- related products
• Companies operating in SEZ pay no corporation tax for the first 5
years and zero tax on dividends for 5 years
• Zero import duty on capital goods and specialized vehicles

21. Zambia – Gross Saving Rate (% of GDP)
Gross national saving (for households,
businesses and government) in Zambia
climbed from 2000 onwards and has
remained above 30% of GDP since 2008.
Gross saving = GDP minus consumption by
government and the private sector, expressed
as a percentage of GDP. A high gross domestic
saving rate usually indicates a country's high
potential to invest in capital

22. Zambia – Tax Revenues (% of GDP)
This chart relates to a key feature of the F585 case study. Over the last fifteen years – save
for a large spike in 2005, the Zambian government has not achieved a rise in tax revenues as
a share of their GDP. Tax income has remained below a fifth of their annual GDP, limiting the
financial resources available for the government to spend on public and merit goods.

23. Gross Government Debt for Zambia
22
19
21
19
21
25
29
35
42
45
0
5
10
15
20
25
30
35
40
45
50
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Gross Government Debt for Zambia, measured as a % of GDP
The Zambian government has been
borrowing heavily to fund investment – it
has issued several billion worth of
Eurobonds. Collapsing copper revenues
and slower growth is now causing a fast-
rising budget deficit and rising debt.

24. Some Advantages of Foreign Direct Investment (FDI)
Infrastructure
accelerator effects – a
rise in investment/GDP
Higher capital intensity /
capital deepening i.e.
more capital per worker
Better training for local
workers – improved
human capital
Grows a country’s
export capacity (e.g.
special economic zones)
Technology & know-how
transfer / diversification
of the economy
More competition in
markets which then
lowers consumer prices
Creates new jobs –
higher incomes and
household savings
Lift in the level of labour
productivity which
increases GNI per capita

25. Risks from Foreign Direct Investment (FDI)
Inequality – profits from FDI
are flow disproportionately
to powerful elites
Land grabs / extractive FDI
which generates little extra
tax revenues
Ethical standards from TNCs
may be poor – especially in
mining, farming and textiles
Volatile / footloose FDI flows
– e.g. FDI is more volatile
than remittance flows
Limited job creation effects /
small spillover for local
content suppliers
Monopsony power of TNCs
who are able to negotiate
highly favourable prices

26. Productivity Gaps in Zambia
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0 10 20 30 40 50 60 70 80 90 100
Relativeproductivity
Cumulative employment share (%)
Construction
Mining & utilities
Manufacturing
Transport, storage, comms
Other
Wholesale, retail, hotels
Agriculture
Productivity in agriculture is far
and away the lowest of any
sector in the Zambian economy.
Measures to lift efficiency would
do much to sustain higher per
capita incomes in the long run

27. Number of Export Items and Markets, Zambia, 2005–13
90
95
100
105
110
115
120
125
130
-
500
1,000
1,500
2,000
2,500
2005 2006 2007 2008 2009 2010 2011 2012 2013
No. HS 6-digit subheads exported (left axis) No. of markets (right axis)
28 EU countries are counted individually e.g. UK, Germany etc.
Source: UN’s COMTRADE database
Number of export items (LHS)
In common with many primary product
dependent countries, Zambia exports only
a limited number of separate products.
This number has declined since 2008 as
has the number of individual markets after
a significant rise from 2006 onwards.

28. Zambian Currency versus the US Dollar ($)
Zambia operates with a floating exchange rate with the central bank prepared to
intervene using monetary policy if necessary. The central bank has an inflation target
of 7% in the near term, falling to 5% in the medium term.
2014-2015 has seen a significant
depreciation in the value of the
Zambian currency against the US
dollar. Consider the benefits and
the costs of such a fall in the
external value of their currency
for the Zambian economy

29. Ethiopian Shoe Factory (2013)
Source: http://fsmevents.com/csae/2016/session11/assets/slides.pdf

30. Garment Factory in Rwanda (2015)
Source: http://fsmevents.com/csae/2016/session11/assets/slides.pdf

31. Challenges for Economic Transformation in Zambia
Enterprise
Diversification
Resilience
Productivity
•Drive private sector innovation
•Micro-finance in urban and rural
areas to promote gender equality
Less reliance on state businesses
•Lower the risk of premature de-
industrialization of manufacturing
•Expand tourism / financial services
•Expand food exports to China
•Raise household income and savings
•Expand insurance and pensions
•Stronger government finances with a
fairer mining tax regime
•Expand FDI into commercial farming
•Raise human capital / expertise
•Address huge infrastructure gaps
The crucial challenge facing Zambia is to take steps to improve
inclusive sustainable growth and maintain macro stability.
Economic growth in Africa in future years is likely to favour less resource-intensive countries such as
Ethiopia, Kenya and Uganda. These nations have a more diverse economy & larger consumer markets

32. Tutor2u.net/economics @tutor2ugeoff
Extract 5
Extract 5 is where the 20 mark OCR F585
discussion question will come from