There is so much written in academic journals, government and agency reports, as well as newspapers, about the need to diversify the Zambian economy…but nothing seems to happen. To the man in the field, factory or street this story has now been told so many times that either they don’t believe it – or they don’t care. I believe that what matters to them is a decent standard of living – and if this comes via a diverse economy or one reliant on mineral extraction they don’t really mind. However, the job of politicians and businessmen is to take the decisions that will fulfil the obvious requirements for diversification of the economy. No one pretends that this is an easy process or that it can be achieved in a short time. But there is an obligation on us to act now to ensure a diverse economic future for our country. Once again then – what is economic diversification and why should we diversify the Zambian economy? Economic diversification shifts an economy away from a single income source toward multiple sources from a growing range of sectors and markets. This might be viewed as a common-sense approach of not putting all the eggs into one basket. Traditionally then, diversification has been applied as a strategy to encourage positive economic growth and development across a wide range of sectors. In the case of our country, our dependence on the extraction of minerals results in economic growth being unbalanced across the economy and skewed towards the mining of our mineral wealth.
Because this lack of diversification holds back overall growth in the economy, its absence leads to sluggishness in achieving important economic development and poverty reduction. But apart from just not achieving our objectives, a lack of economic diversification is often associated with increased vulnerability to external economic shocks. These in turn can undermine prospects for longer-term economic growth. Increasing economic diversity stabilises export revenues and so makes countries less vulnerable to commodity price fluctuations or unstable currency exchange rates. So, economic diversification is widely seen as a positive trade objective that leads to sustainable economic growth. Perhaps unsurprisingly then, evidence shows that greater economic diversification leads to rapid growth of per capita income – thus making individual citizens better off. How then should we go about curing what economists call the “Dutch Disease”? This is shorthand for the paradox that occurs in an economy when good things, like the availability of natural resources, actually cause broader harm to it in the long run. And our economy is dominated by mineral extraction. A classical symptom of the “Dutch Disease” is rising currency values. The problem for the Kwacha is that exports of natural resources from Zambia support the currency above the natural value than it would otherwise have. This is because our minerals are in high demand and their supply is apparently never ending. This makes the Kwacha more attractive in international markets than it would be without counting into its value our mineral wealth.
This artificial strengthening of the currency in turn decreases the price competitiveness of our other exports. So, we sell fewer other products abroad. It could be said that the rush of minerals to the export market is pushing out the opportunities in international markets for other excellent Zambian products.
In the long run these factors contribute to unemployment in our country because there are fewer exports to warrant the creation of new jobs and so the jobs that could be carried out here move elsewhere. Effectively what is happening is that non-natural resource- based industries suffer because of the easy money that is generated by the mineral extraction industry.
This is not to say that earnings from mineral extraction are a bad thing. Copper mining has been the major earner of foreign exchange for the country over the years. But as early as the First National Development Plan (1966-1970), both the need to diversify away from copper, as well as to grow other sectors such as agriculture and manufacturing, were emphasized – and this aim continues to be of great national importance.
One has only to look at some other resource rich countries like Australia, Canada and Norway to recognise that the “Dutch Disease” is a trap that countries can avoid. They do this, firstly by having government policies in place that drive the diversity of economic activity. They also rely on maintaining strong institutions which are a barrier to wide-spread corruption. Indeed, a high degree of natural resource dependence is often associated with worse institutional effectiveness as well as with reduced levels of competition across the economy. So a clear government desire achieve diversification in tandem with strong institutions are key contributors to the long-term diversification of our economy.
Where can we seek viable diversification opportunities? The government’s seventh National Economic Development plan is already (in the period 2017 to 2021) working to diversify eight sectors: agriculture, mining, tourism, energy production and distribution, international trade, water management, communications technology and employment opportunities. These are very different areas but essentially the idea is to get the economic players within them exporting and attracting foreign currency into the country. But research has shown that small and medium-sized enterprises’ access to finance is a strong constraint on them growing export markets.
This is because as firms begin to export they naturally face higher costs resulting from their lack of knowledge and experience – but gradually these issues are resolved and their ability and desire to export will increase. Thus, firms who wish to export should be supported in these early phases of exploring exporting opportunities. This support should be in the form of direct help to these ambitious companies by providing access to finance. As a first step in this direction, access to trade finance can be regulated by determining an appropriate balance between the amount of domestic credit circulating in the economy and the share of private sector credit.
Whilst helping individual firms in their drive to export, it is also the government’s role to manage the macroeconomic environment. The exchange rate for the Kwacha, the rate of inflation, the level of real interest rates and are the macroeconomic variables that drive economic diversification. These are impacted by the governments fiscal policies which should be adjusted to encourage the headline goal of achieving economic diversity.
In addition to fiscal policy the government may also encourage increases in the net level of inflows of foreign direct investment (FDI) – primarily aimed at the sectors where diversification is desired. Overall, investment as a share of GDP, from both FDI and internal sources, is also an important factor in facilitating economic diversity. So anything the government does to encourage investment in the chosen sectors will have a long term beneficial effect on the achievement of economic diversity.
In the critical agricultural sector, where many of our citizens find their employment, the government is looking at diversifying from the very significant position that maize cultivation holds in the economy and to augment it with higher levels of cultivation of sugar, coffee and cotton. The idea being that these crops would provide new export opportunities for the sector as part of the overall drive to diversify agricultural activity. There are also many interesting ideas around the expansion and growth of aquaculture. These are excellent policies – but they must be brought to fruition.
Whilst travel and tourism is Zambia’s fastest growing sector – contributing US$1,846.9MN (ZMK19.4 billion) to the national economy and some 320,000 jobs in 2018 – local tourism remains a potential area for growth that must be encouraged. There is immense potential for growth in the tourism sector and the diversification effort can be achieved by integrating the country’s rich cultural heritage into tourism packages of interest to the domestic tourist. At the same time effort must be made to lengthen the stay period of foreign visitors from the current average of 4 days to 6 days – a 50% increase in potential revenue and a marked contribution to economic diversification.
Manufacturing remains a small sector within the Zambian economy and accounts for about 11% of the country’s GDP. Usefully, and as it tries to promote local content, the Government is implementing the National Local Content Strategy aimed at fostering business linkages between micro, small, medium and large enterprises. Pleasingly, the strategy aims to promote use of at least 35 percent locally available inputs in industrial processes. As it attempts to speed up industrialisation, so the government is working on setting up industrial parks and multi-facility economic zones to encourage companies into the field and into the country and this is a good long term approach to the issue of diversification of manufacturing.
The most important manufactured products in Zambia are food and beverages which account for nearly two thirds of all production, followed by textiles, leather, wood products, paper products and chemicals. A rebalancing within these sub-sectors is called for so that food and beverage do not play such a dominant role. This must be done by growing activity in the remaining areas of manufacturing but also by looking at other approaches to the manufacture of goods.
Secondary processing of metals is another important activity in the manufacturing sector. It includes the smelting and refining of copper domestically – an activity that adds value to the extracted mineral wealth before exporting takes place and which thus contributes to the process of economic diversification.
The energy sector is vital as a powerhouse of diversification in all other sectors. There is an urgent need to speed up the development of power projects due to the increase in demand for energy but it is clear that there are many opportunities for diversification in the sector itself not only in traditional generation methods but also in mini-hydro and solar technology.
So as we begin finally to take the question of economic diversification seriously, how can we know that we are succeeding? There are of course benchmarks in the world that we might take note of…Rwanda’s programme that was entitled “Vision 2020” being a case in point. This was a long-term development strategy with the main objective to transform Rwanda into a middle-income country by 2020 based on a thriving private sector. Since then, the Rwandan economy has been growing steadily and so earning the country a reputation as one of Africa’s fastest-growing nations. South Africa is a large diversified economy where the government has taken steps to ensure improvements to infrastructure particularly in renewable energy. We must take note of these examples and outstrip them by employing far-seeing and radical approaches such as Public Private Partnerships in pursuit of our own diversification strategy.
At the root of all diversification efforts is a workforce that is ready to take advantage of the opportunities that arise. This means a solid and functioning education system that prepares young people to have the skills necessary for work in the 21st Century. Young people have to be shown how a diversification process will benefit them in terms of availability of jobs and better pay and conditions. Equally it has to be pointed out, that the long-term success of such projects depends on them investing their own time in this educational preparation. Without educated young people there will be no diversification.