Introduction
This Report reviews the investment policies and their performance in
Zambia, as part of the Investment for Development (IFD) project being
carried out by Consumer Unity & Trust Society–Africa Resource Centre
(CUTS-ARC).
Foreign Direct Investment (FDI) has come to be widely considered as an
engine of growth. Developing and transition economies have scored varying
degrees of success in attracting FDI, largely depending on the extent to
which they have set up the requisite ‘enabling environment’ for investment.
Every country is a potential investment destination and actual investment
flows have been seen to be dependent, to a large extent, on the country’s
attractiveness to investors and investor institutions. This attractiveness
is based on certain determinants affecting the perceptions of investors
as to whether or not they should invest in a country.
The existence of uncertainty and risk, due to several factors act as
disincentives to both foreign and domestic investment. These may include
macroeconomic instabilities, such as large external debt burdens,
variability of exchange and inflation rates, political uncertainty, etc. All or
some of which may connote fragility of a country’s investment climate,
despite the existence of viable opportunities.
Further, FDI decisions may be motivated by market access and production
cost considerations in general terms. However, most African countries
have scored success in receiving FDI, based on whether or not their
economies are liberalised to international trade, existence of quality
regulatory institutions and physical infrastructure and economic growth
and stability1. This report tries to look at the existence of these factors
in Zambia.
Zambia achieved independence from Britain in 1964. In the first decade
of independence Zambia experienced considerable economic growth.
During that period, most major socio-economic sectors manifested
substantial rates of growth, especially the manufacturing industry. The
Government pursued a policy of diversification of the manufacturing
industry. Prior to its independence, Zambia depended heavily on
manufactured goods imported from South Africa. The diversification policy
pursued achieved considerable success in this regard, despite acute
shortages of skilled manpower and a serious transport bottleneck.
For instance, the index of industrial production for all manufacturing sectors
increased from 124.4 in 1964 to 221.2 in 1967. The sector’s contribution
to the GDP increased from K28.2mn (US$40.3mn* ) in 1964 to K95.5mn
(US$136mn) in 1967. The price of copper was very high, resulting in the
economy averaging a 13 percent annual growth rate in real terms until
1970. The total employment expanded from 268,700 in 1964 to 372,130
by June 1970. Employed workers also enjoyed a 97 percent rise in
earnings between 1964 and 1969, while the consumer price index rose
by only 37 percent.
Another major achievement during the first decade of the independence
was the expansion of the country’s economic infrastructure. When
Rhodesia (now Zimbabwe) declared its Unilateral Declaration of
Independence (UDI) in 1965, the Zambian Government responded with a
policy of disengagement from the inherited southern neighbours by
adopting actions, such as the completion of the oil pipeline to the
Tanzanian port of Dar-es-Salaam in 1968; mining of its coal deposits;
achievement of self-sufficiency in electric power by 1974; the completion
of TAZARA, the rail link to Dar-es-Salaam, by 1974; air traffic control,
etc. When the Rhodesian Government decided to close the border with
Zambia in 1973, the said policy actions proved very effective. The border
was closed as the Rhodesian Government believed that Zambia was
supporting the ‘terrorist’ freedom fighters against the former. The first ten
years of Zambian independence will also go down in history as the period
during which considerable foreign investment came into the country under
the many bilateral agreements.
Further, apart from the localisation of manpower in the civil services and
mines, it needs to be recognised that the considerable economic growth
came about due to two main factors: the deliberate government policy of
filling the ‘indigenous business’ gap through nationalisation and
investments into the formerly foreign-owned corporations operating in
Zambia, following the 1968 Economic Reforms. The government was able
to perform this investment function from the copper sale proceeds, due
to prevailing high prices at the time. Secondly, when the Government of
Southern Rhodesia declared a UDI , Zambia disengaged itself from that
country. As a result, firms that previously exported to Zambia sought to
safeguard their markets by investing directly into Zambia.
Things began to deteriorate from mid-1970s, due to a fall in the export
price of copper and an increase in the prices of imported petroleum
products. This external shock resulted in the depletion of the country’s
external reserves, a rise in external borrowings and foreign aid. The external
borrowings and foreign aid were not only inadequate, but also not
sustainable in the long run because it increased the country’s
indebtedness. Since then, Zambia has experienced economic downturns,
largely due to little or no investment in many sectors of the economy,
especially the state-dominated parastatal sector, which controlled over
80 percent of the economy, including the mainstay, the mining sector,
until early 1990s. Further, the little investment that took place continued
to be in the traditional raw material production, an area that is very
sensitive to the adverse impacts of the lowering prices and competition
from synthetic products. In short, limitations to value-added production
have continued to haunt the economy.
In 1991, the country moved from one-party participatory democracy to a
plural parliamentary democracy. A new government committed to a free
market capitalist system was elected. The new government embraced
the structural adjustment programme (SAP), with the support of the
International Monetary Fund (IMF) and the World Bank (WB).
The socio-economic challenges that abound the country in the face of
the daunting economic scenario have largely had a negative impact on
the people. The human development index has continued to deteriorate
and nearly three quarter of the population has been categorised as poor.
Zambia’s average annual population growth rate ranges between 2.7 and
3.1 percent in rural and urban areas. The country’s population below the age of 15 was estimated to be 49 percent in 1977, a figure that underlines
a high dependency ratio to overall population. By 1993, about 42 percent
of the population was living in urban areas, where the population density
is as low as 13.6 persons per square kilometre.
Life expectancy, according to the official estimates of 2002, is 50 years
and almost a quarter (23 percent) of the population cannot read or write.
Whereas the water and sanitation facilities have remained inadequate,
food security has not been guaranteed over the years. Zambia has a dual
economy, dominated by an industrial copper mining and processing
enclave, while the rest of the country is dependent on rain-fed smallholder
agriculture. Gross National Income is estimated to be around US$3bn
and the per capita income is US$300. In terms of international comparison,
Zambia is classified as a least developed country (LDC) and rated as an
externally highly indebted and internally distressed poor country, under
the HIPC categorisations.
According to the World Bank Group Report 2002, 73 percent of the
population has been classified as poor. The Gini Coefficient gives the
country a high degree of social inequality. The lowest 10 percent of the
population accounts for a paltry 1.1 percent of the national income,
whereas the top 10 percent take 41 percent of the national wealth.2
On the basis of the foregoing, this study on investment policy framework
in Zambia comes at an opportune time, when the country and its people
are seeking a way forward in tackling poverty and deprivation.
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