Comments on

What are the constraints on inclusive

growth in Zambia?Elena Ianchovichina and Susanna Lundström

Arne Bigsten

University of Gothenburg

1. Purpose

• The main purpose of the analysis is “to identify the key constraints on inclusive (and sustained) growth in Zambia” and to sequence them to get inclusive growth going.

2. Approach

• The method outlined is inspired by growth diagnostics a la Hausmann et al.

• Looks at both supply and demand side conditions that prevent the poor from taking part in the growth process.

• On the supply side the idea is to look at constraints that hamper employability and access to labour markets.

• On the demand side the focus is on obstacles to job creation and productivity improvements.

• Is it more fruitful to start the analysis from the poor individual rather than from “above”.

• It is certainly important to discuss the poor's assets and market access and to find ways to give them better access to resources and capacity and open up new opportunities. But for the policy discussion we need to consider reasons as to why there is lack of wage/self-employment or low returns, and on the whole this approach leads us to the usual suspects

• Points to business environment analysis and analysis of productivity dynamics, possibilities for economic transformation and diversification, constraints affecting labour mobility cross sectors and regions, labour market constraints, access to education, finance and infrastructure. This looks like a comprehensive review.

• Pedagogical advantage?

3. Analysis

• The main conclusion from the analysis is that the main binding constraint is negative coordination externalities.

• This refers to poor access to domestic and international markets, inputs, services, and information. If further covers high indirect costs – on infrastructure and service related inputs into production including energy, transport, telecom, water, insurance, marketing and professional services.

• Or poor market integration and poor infrastructure. • So why this term? Does the fact that something is or

poor quality mean that it is a negative externality

• Or is the concept aimed to pick up coordination failures that mean that the country is stuck in some low level equilibrium? It is for example noted that "the services needed require simultaneous, large-scale investments in various sectors of the economy."

• This seems to suggest that we need a Big Push (a la Sachs). Is that the message? If so, this should be made clear and it may require a special discussion of the problems associated with it.

Focus on employment is important.

The paper notes that the growth has largely taken place in sectors such as community and social services, real estate and business services, wholesale and retail trade, which are characterised as employers of last resort.

Are we talking about the informal sector?

People are leaving agriculture but the formal sector does not absorb many of them. Since K/L is hardly going up in Africa the mover get stuck in activities requiring little capital, that is typically informal sector activities.

These are OK since they keep people alive, but they are hardly the basis for an economic take-off. The informal sector does not pay taxes, does not export, and does not invest very much.

So how to get from this state to some something more promising would be an interesting topic in a discussion of pro-poor growth.

High cost of capital or lack of access to capital is almost always cited in surveys of entrepreneurs as top constraints on investment and growth. However, investments are also held back by lack of sufficiently profitable (given risk premiums) investment opportunities.

It is argued that the fiscal impact of the mining boom really been “negligible”. I understand that direct payments have been very low (but increasing), but the indirect effect I would assume to be substantial?

Diagram 7: Rural growth incidence curve

Source: Own calculations

01

23

45

Ru

ral g

row

th b

y de

cile

s (%

)

0 10 20 30 40 50 60 70 80 90 100Rural consumption deciles

Annualised growth 1998-2004 for each consumption decile (%)

Rural growth incidence curve

Diagram 8: Urban growth incidence curve

Source: Own calculations

01

23

45

Urb

an

gro

wth

by d

ecile

s (

%)

0 10 20 30 40 50 60 70 80 90 100Urban consumption deciles

Annualised growth 1998-2004 for each consumption decile (%)

Urban growth incidence curve

Table 9: Decomposition of changes in rural moderate poverty Period Growth

component Redistribution Component

Residual Total change In poverty

Head count (P0) 1998 to 2004 -6.53 0.21 0.34 -5.98 Depth (P1) 1998 to 2004 -7 1 0.16 -5.84 Severity P(2) 1998 to 2004 -6.06 1.1 0 -4.96 Source: Own calculations. Table 10: Decomposition of changes in urban moderate poverty Period Growth

component Redistribution component

Residual Total change In poverty

Head count (P0) 1998 to 2004 -5.9 2.85 0.12 -2.93 Depth (P1) 1998 to 2004 -3.45 1.84 -0.13 -1.74 Severity P(2) 1998 to 2004 -2.28 1.2 -0.14 -1.22 Source: Own calculations.

Table 13: Income diversification per quintile, percent Quintile 1 2 3 4 5 Year 2001 2004 2001 2004 2001 2004 2001 2004 2001 2004 Crops, own cons. 73.8 73.2 65.6 64.9 56.1 53.9 41.0 42.9 15.2 16.3 Crops, sales 7.0 8.4 9.7 13.8 14.4 16.4 15.4 20.6 10.3 17.7 Vegetables, sales 2.6 1.9 3.2 2.0 4.8 4.0 5.6 4.4 6.0 6.1 Livestock, income 2.4 5.6 2.9 5.0 3.7 6.4 3.9 6.5 2.3 4.2 Wage income 2.7 4.4 3.9 4.3 5.6 6.6 13.7 10.3 30.6 24.6 Remittances 5.0 2.4 4.4 1.8 3.3 1.7 2.8 1.3 1.3 0.8 Own business income 6.5 4.0 10.3 8.1 12.1 11.0 17.7 14.0 34.3 30.4 Sum 100 100 100 100 100 100 100 100 100 100 Source: Authors’ own calculations

Also PPG needs growth analysis.(a) Aggregate growth(b) Access of the poor(c) Policy conclusions

If coordination or integration is the key we need to analyse the institutions delivering it, such as firms and government, to be able to come up with polciies.

4. Policy conclusions

(1) Do something about “negative coordination externalities”(2) Deal with the real appreciation(3) Improve productivity(4) Improve access to capital(5) Improve the quality of and access to secondary and tertiary education

(1) Improve tax revenue collection(2) Improve government’s financial management(3) Improved public sector efficiency and monitoring(4) Improve infrastructure (5) Private sector development strategy should be made more efficient and avoid excessive intervention. If Zambia is to be able to reach an economic take-off, the country must be an attractive destination for both foreign and domestic private investors with a better business environment and improved infrastructure.(6) Poverty relevant social services such as health and education remain vital.(7) Social protection(8) Improved governance is the key to successful development.

Important themes in a PPG analysis for Zambia

(a) Market integration(b) Infrastructrue(c) Informal sector links (d) Political economy(e) Policy implementation