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3
Higher and less volatile growth rates
-15
-10
-5
0
5
10
15
20
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
%
0
50
100
150
200
250
300
350
400
450
500
LC
U t
ho
usa
nd
s
GDP per capita growth (annual %) GDP growth (annual %)
GDP per capita (constant LCU)
Development driven by discrete events or potentially sustainable growth?
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
1965
1970
1975
1980
1985
1990
1995
2000
2005
0
1000
2000
3000
4000
5000
6000
7000
Production (mt'000) LHS International price (constant 1990 USD mt) RHS
0
20
40
60
80
100
120
140
1980 1985 1990 1995 2000 2004
Num
ber o
f exp
orts
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Inde
x/sh
ares
No. of products exported (> 10,000 US$)
Herfindahl Index
Five largest (share of merchandise exports)
Loans to the private sector
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
Dec-9
8
Jun-9
9
Dec-9
9
Jun-0
0
Dec-0
0
Jun-0
1
Dec-0
1
Jun-0
2
Dec-0
2
Jun-0
3
Dec-0
3
Jun-0
4
Dec-0
4
Jun-0
5
Dec-0
5
Jun-0
6
Dec-0
6
Jun-0
7
Agriculture, forestry,Fishingand huntingMining and quarying
Manufacturing
Electricity, gas, water andenergyConstruction
Wholesale and retail trade
Restaurants and hotels
Transport, storage andcommunicationsFinancial services
Community, social andpersonal servicesReal estate
Other sectors
Rural poverty reduction not responsive to growth
20
30
40
50
60
70
80
90
100
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Po
vert
y H
ead
Co
un
t (%
)
150
170
190
210
230
250
270
290
310
GD
P P
er
cap
ita (
1994 K
wach
a)
National Headcount (LHS)National Rural (LHS)National Urban (LHS)Poverty headcount at 1US$ a dayGDP Per Capita (RHS)
What were the sources of income for the rural poor in Zambia?
Table 1: Mean Shares of Household Income by Source, by Income Quintile, Rural Areas
Quintile of National Distribution All Poorest
20% 2 3 4 Richest
20% Food crop sales 6 7 6 6 6 5 Nonfood crop sales 2 1 2 3 2 2 Non-farm business 10 11 10 10 13 11 Livestock and other ag. Income 2 2 2 3 2 3 Salary 6 3 5 6 7 11 Remittances 6 7 6 6 7 5 Pension 0 0 0 0 0 0 Nonagricultural rent 0 0 0 0 0 0 Other income 11 13 12 12 11 9 Consumption of own production 55 57 55 54 55 52
Source: World Bank (2007a)
Most rural poor were smallholder subsistence farmers
What were the sources of income for the urban poor in Zambia?
Most urban poor were employed in informal businessesand relied on multiple activities as a source of income
Table 3. Mean Shares of Household Income by Source, by Quintile, Urban Areas
Quintile of National Distribution All Poorest 20% 2 3 4 Richest 20% Non-farm business 24 25 27 27 26 19 Salary 50 38 40 46 50 60 Remittances 6 8 6 5 6 5 Other income 15 20 19 16 14 13 Consumption of own production 5 9 7 7 4 3 100 100 100 100 100 100
Source: 2002-03 LCMS
Substantial productivity differentials Labor productivity in agriculture much lower than labor productivity in
other sectors Paths out of poverty: mainly through new employment opportunities in low-
cost urban areas, or higher returns in other urban areas Value added per worker in Zambia
0
500
1000
1500
2000
2500
3000
2000 2001 2002 2003 2004 2005 2006
LCU
in th
ousa
nds
Total Agriculture Industry Services
Source: Authors’ estimates based on data from Government of Zambia and World Bank.
70%
7%
23%
Agriculture
Industry
Services
Any reasons to focus on agriculture?
Even a sizable increase in employment in urban industries will result in relatively few urban jobs
Evidence that there is potential for productivity improvement in agriculture
Figure 1: Distribution of employed by industrial sector in the rural and urban areas (2004)
0
500000
1000000
1500000
2000000
2500000
Agric. Mining Manuf. Elect. Constr. Trade Hotels Transp. Finance Commun.
Rural
Urban
Source: CSO (forthcoming)
The booming mining sector: implications for employment
The capital intensive nature implies that few new jobs are created
Adverse REER effects on the competitiveness and job opportunities of the tradable sectors
Look for constraints to inclusive growth
Consider agriculture as well as non-agriculture activities
Self as well as wage employment
Economic Growth
Poverty Reduction/Inclusion
Wage-employedSelf-employed
Employability Analysis (EA)
Business Environment Analysis (BEA)
Income increases through productive employment
EA: Individual constraints viewed from the perspective of different economic actors
BEA: Firm constraints viewed from the perspective of different economic actors
Is education a major constraint for the poor as individuals?
Major difference in mean years of education between the rich and poor households in urban areas, and limited access to higher education in rural areas
Table 1: Mean years of schooling of household head in 2002/03
All Poorest 20% Richest 20% Rural 5.3 4.4 6.2 Urban 9.3 6.6 11.1
Source: World Bank (2007a)
0102030405060708090
100
Middle Basic School(1-7)
Secondary School
Rural
Urban
Percentage of households with access to education facilities within five kilometers
Is health a major constraint for the poor?
HIV/AIDS costs almost 1 percent in GDP growth per year Prevalence rates are high: 17% of working age
population in 2005 compared to the SSA average of 6%.
High prevalence rates combined with poor health care provision and other diseases undermine Labor stock and ability to provide labor Productivity of the work force Incentives for investment
Are material assets and access to land a major constraint to labor supply?
Rural households are in general asset poor Customary land arrangements with limited transfer possibilities
are dominant, with only 6-15% of land under statutory tenure The land system is not perceived as a binding constraint to
inclusive growth Land is abundant – only 40% of arable land is used Most smallholders who demand more land get land from their chiefs (only
4% of respondents mentioned lack of land as a reason for poverty) Despite small plot sizes, a typical household does not have capability to
cultivate more land The system creates risks to future returns on investments Lack of serviced land with access to infrastructure is a perceived binding
constraint to operations implying not land, but rural infrastructure is a bottleneck
Economic Growth
Poverty Reduction/Inclusion
Wage-employedSelf-employed
Employability Analysis (EA)
Business Environment Analysis (BEA)
Income increases through productive employment
EA: Individual constraints viewed from the perspective of different economic actors
BEA: Firm constraints viewed from the perspective of different economic actors
Business Environment Analysis
Returns to economic activity
Cost of finance
Social ReturnsPrivate
AppropriabilityInternational sources
of financeLocal sources
of finance
Domestic savingsFinancial sector intermediation
Government failures Market failures
Macro risks Micro risks
Is the cost of capital a binding constraint to firms’ investment and growth?
Figure 1: Real cost of capital (average)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Per
cen
t
Zambia Mongolia South Africa Uganda
Source: Authors’ own calculations using World Bank data.
But, cost and access of capital differentials are sizable
Access and cost of capital varies with the size of the firm In 2003, nearly 50 percent of larger firms had a
loan, while only 19 percent of small firms had a loan
The cost of capital differential between large and small firms was more than 10 percentage points
Similar differentials existed between the cost of capital of exporters and non-exporters, domestic and foreign companies
Micro firms face even steeper constraints
What are the reasons for the poor access to and high cost of finance for small and micro firms?
Poor financial intermediation rather than low domestic savings or bad international finance Domestic savings as a share of GDP climbed up from 6%
in 1990s to 18.1% in 2006, a share higher than the SSA average
FDI and aid have been higher than the average for SSA and LICs both in 1990s and 2000s
However, there are signs of improvements the percentage of people identifying the cost of finance as
the main reason for their poverty status halved in the period 2002-06
Business Environment Analysis
Returns to economic activity
Cost of finance
Social ReturnsPrivate
AppropriabilityInternational sources
of financeLocal sources
of finance
Domestic savingsFinancial sector intermediation
Government failures Market failures
Macro risks Micro risks
Do low social returns constrain income growth?
Zambia is well endowed with natural resources Landlocked geographic position:
Pros: Serves as an import tax protecting domestic import-competing industries; borders 8 countries and plays an active role in regional trade
Cons: reaching global markets and realizing economies of scale is a problem Affects ability to export bulky low–value products (e.g. farm
products) Requires well-developed air transport and an emphasis on high
value, low weight and volume goods
Access to air transport is low for Zambia’s level of per capita income
ZambiaZambiaZambiaZambia
GDP per capita (logs)
Fitted values 95% CI
Are infrastructure and basic services a binding constraint to income growth?
High domestic transport costs due to poor domestic road condition and high fuel costs: affect the ability of rural residents to access markets;
The reasons for poor access is not always because of limited supply (e.g. electricity), but because of industry structure and interests
Poor quality and expensive basic services undermine the competitiveness of firms and slow down job creation
Connectivity servicesMobile rates per minute
$0.44
$0.32
$0.29
$0.27
$0.25
$0.25
$0.21
$0.14
$0.10
$0.04
$0.00 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 $0.45
Zambia
Botswana
Malawi
South Africa
Tanzania
Swaziland
Namibia
Mozambique
Zimbabwe
Mauritius
Source: Mattoo and Payton (2007)
Business Environment Analysis
Returns to economic activity
Cost of finance
Social ReturnsInfrastructure servicesBinding constraint to
growth
Private Appropriability
International sourcesof finance
Local sourcesof finance
Domestic savingsFinancial sector intermediation
Government failures Market failures
Macro risks Micro risks
Is the macroeconomic environment a binding constraint to inclusive growth?
Exchange rate developments
50
60
70
80
90
100
110
120
130
140
150
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
RE
ER
in
dex
(1
99
7=
10
0)
.
0
1,000
2,000
3,000
4,000
5,000
6,000
No
min
al K
wac
ha
per
do
llar
.
Changes in the second half of 2008 Kwacha significantly depreciated
Strengthening of the US dollar Falling copper prices Large withdrawal of portfolio investment Domestic political uncertainty
This depreciation represents a correction of the overvaluation observed earlier
Sound macroeconomic management extremely important
Business Environment Analysis
Returns to economic activity
Cost of finance
Social ReturnsInfrastructure servicesBinding constraint to
growth
Private Appropriability
International sourcesof finance
Local sourcesof finance
Domestic savingsFinancial sector intermediation
Government failures Market failures
Macro risksREER appreciation
Binding constraint togrowth
Micro risks
Is regulatory uncertainty and government interventions an obstacle to inclusive growth?
Regulatory uncertainty is the fourth most binding constraint to firms’ operations Most of firm owners (70 percent) think that officials’
interpretation of regulations is inconsistent and unpredictable
Problem is especially acute in agriculture Fertilizer subsidy program
Last minute contracts push up the cost of the input Program not well targeted opens opportunities for rent seeking Program is expensive (accounts for 50% of the budget earmarked
for agriculture, compared to only 3% for irrigation and other rural infrastructure)
Other government failures
Tax system and administration Administrative procedures Governance (indirect effect on capacity and
delivery of binding constraints)
Business Environment Analysis
Returns to economic activity
Cost of financeBinding constraint for
microfirms
Social ReturnsInfrastructure servicesBinding constraint to
growth
Private Appropriability
International sourcesof finance
Local sourcesof finance
Domestic savingsFinancial sector intermediation
Government failures Market failures
Macro risksREER appreciation
Binding constraint togrowth
Micro risksRegulatory uncertaintyBinding constraint to
growth
Are market failures binding constraints for income growth?
Firms need services requiring simultaneous, large scale investments in: basic infrastructure and connectivity services which
ensure access to inputs and foreign markets; marketing, state-of-the-art technology, and product
quality information services Might be a development trap:
No incentives for private investor before a certain level of economic activity
Especially severe in sparsely populated countries
Rural-urban differentials in connectivity service provision
Poor access and high cost of basic services are major constraints to growth Rural areas are at a disadvantage relative to urban areas
0
20
40
60
80
100
120
FoodMarket
InputMarket
Post Office PublicTransport
PublicPhone
InternetCafe
Rural
Urban
Source: CSO (forthcoming)
Number of households with access to facilities within 5 km
Farm level productivity is negatively correlated with weak service performance Examples where there were positive coordination externalities (e.g. outgrower schemes)
Business Environment Analysis
Returns to economic activity
Cost of finance
Social ReturnsInfrastructure servicesBinding constraint to
growth
Private Appropriability
International sourcesof finance
Local sourcesof finance
Domestic savingsFinancial sector intermediation
Government failures
Market failuresCoordination failuresBinding constraint to
growth
Macro risksREER appreciation
Binding constraint togrowth
Micro risksRegulatory uncertaintyBinding constraint to
growth
Bindings constraints to inclusive growth in Zambia
Regulatory uncertainty and government interventions (stop doing harm before doing good, especially severe in agriculture)
Lack of positive coordination externalities (rural-urban connectivity)
Access to post-primary education and health for the poor