| CHAPTER 1 | | | | stagnation. According to them, the foundation for |
| INTRODUCTION AND THEORETICAL BACKGROUND | | | | higher growth have been laid by liberalising the |
| Economists through out the world are searching for | | | | markets, broad tax and tariff reforms, financial |
| what really are the major determinants of growth of | | | | sector reforms and by privatising the state |
| an economy and different policies have been used in | | | | enterprises. The key element in the |
| pursuit of the answers. The world as large has gone | | | | government’s programme has been the |
| through a lot of economic problems, such as | | | | reduction of inflation, which has fallen from 200 |
| depressions of 1930s, 1970s and 1980s. The 1930 | | | | percent in 1990 to 20 percent in 1997. This helped |
| depression led to employing of the Keynesian policies | | | | the GDP to grow by 6.4 percent in 1996/7 period. |
| of strict government intervention. However, the | | | | This dissertation investigates whether there are |
| 1970s depression made policy makers lose faith in | | | | genuine reasons behind economic liberalisation and |
| Keynesian economics. Nevertheless, most Third | | | | related austerity measures, using Zambia as the case |
| World countries continued with their central planning | | | | study, by describing and comparing its economic |
| type of economic policies. There was strong | | | | performance before and after liberalisation. We then |
| disenchantment with this type of policies, which led | | | | use panel data and cross-section regression analysis |
| growing number of economists and influential | | | | on selected African countries to see if the |
| international development organisations to begin, in | | | | econometric analysis results support the calls for |
| recent years, to advocate the increased use of the | | | | liberalisation measures. The dissertation is organised |
| market mechanism that is to liberalise the markets, | | | | as follows Chapter 1 has provided introduction and |
| as the key instrument of promoting greater | | | | theoretical background to economic liberalisation. In |
| efficiency. In this regard economic liberalisation implies | | | | chapter 2, Zambia’s detailed account of its |
| minimisation of government intervention in allocating | | | | pre-liberalisation economic policies is presented. |
| economic resources and letting the market forces | | | | Chapter 3 looks at post-liberalisation economic policies |
| play the cardinal role, doing away with all forms of | | | | of the country. Chapter 4 presents econometric |
| government distortions in running the economy. The | | | | analysis and empirical results, and Chapter 5 concludes |
| market forces should play a leading role in financial, | | | | the findings. It should be borne in mind that this study |
| trade, labour, commodity markets and other sectors, | | | | is not about the direct measurement of the effects |
| increasing reliance in market forces is normally | | | | of liberalisation policies on economic performance. This |
| accompanied by stabilisation programs, (Krueger | | | | is due to the problems cited by Kirkpatrick (1995) and |
| 1978,1985). | | | | the unavailability of many of the data required for |
| There has been an increasing call for the private | | | | undertaking a more detailed study of the country. |
| sector to take up the challenges of national | | | | CHAPTER 2 |
| development. According to Robert Barro (1996), | | | | THE PRE-LIBERALISATION ECONOMIC POLICIES OF |
| most empirical facts point to primacy of government | | | | ZAMBIA |
| choices; countries that have pursued broadly free | | | | Zambia’s economic history traces back to the |
| market policies, in particular trade liberalisation and | | | | colonial era. Zambia a former British colony was |
| maintenance of secure property rights, have | | | | known as Northern Rhodesia. The British’s |
| experienced higher growth, than those which pursue | | | | main emphasis was the mining of copper, which they |
| central planning type of policies. For this reason, there | | | | exported as a raw material. Zambia obtained |
| have been calls for the privatisation programs. | | | | independence on 24 October 1964 with an economy |
| On the other hand Rodrik, (1992) argues that trade | | | | characterised by an industrial enclave based on |
| reforms is frequently met with scepticism on the part | | | | copper mining using British and USA capital (Hawkins, |
| of the private sector and may lack support, the | | | | 1991). During this time there was little or no significant |
| country implementing them suffers from terms of | | | | investment apart from the mining sector, and before |
| trade deterioration which may result into reduction of | | | | independence most of the copper profits were |
| capital inflow and increase capital flights. He goes on | | | | expatriated and very little was re-invested. However, |
| to say that this is coupled with inflation and low zero | | | | in the first years of independence 1964-69 the |
| growth. Krueger (1978) points out that to avoid this, | | | | economy unfolded and great progress was recorded |
| appropriate macroeconomic policies need to | | | | (Turok, 1979). The country had a GDP per capita |
| accompany the increase in price of foreign exchange | | | | that was amongst the highest in Africa; according to |
| (devaluation), or else domestic inflation would soar | | | | Turok, 1979, it was just below that of South Africa. |
| and affect the intended benefits of liberalisation. That | | | | Copper prices were high and the industry was |
| is why stabilisation programs, such as reduction in | | | | profitable, so every indication was towards rapid |
| government expenditures, accompany liberalisation by | | | | growth and development. The economy was more |
| cutting on government consumption, which is often | | | | of a capitalist than a state led. |
| negatively related to the growth of an economy. | | | | 2.1-Post-Independence Economic Reforms |
| However Wha Lee (1993)’s findings in the | | | | Few years after independence in 1968 and 1969, |
| case of Korea are very interesting, Korea gave | | | | President Kaunda, with the then ruling United Nation |
| subsidies to some firms manufacturing exports, | | | | Independence Party (UNIP), initiated reforms. |
| managed to grow faster. He argues that the | | | | According to him, this was to lead state control of |
| theoretical predictions about the link between growth | | | | the whole economy to enhance growth and equal |
| and open trade may be ambiguous and misleading. | | | | distribution of income. It was also aimed at |
| According to critics, tariffs can either enhance or | | | | empowering the indigenous people to control and |
| decrease growth rates, depending on which sector is | | | | decide the destiny of their country’s |
| protected. This is the argument of infant industry. | | | | economy. This was characterised by developmentalist |
| Krueger (1985) notes that LDCs have been | | | | philosophy (command economy) and recognition of |
| protecting infant industries for decades, but they | | | | political realities (Turok, 1979). |
| have still remained infants; this is an indication that | | | | The 1968 and 1969 Mulungushi and Matero economic |
| there is something wrong with the economics of | | | | reforms were meant to repossess the foreign |
| protectionism. Nevertheless Wha Lee (1993) notes | | | | economic and business interests, which now became |
| that since the current theory of liberalisation is | | | | under the state control. The UNIP government also |
| inconclusive, as is the empirical evidence, the link | | | | introduced indigenous import substitutions in the |
| between trade policy and dynamic efficiency is | | | | industrial sector, this was aimed at reduction in the |
| vague, depending on the industry considered. | | | | dependence on foreign manufactured goods. |
| Kirkpatrick (1995) argues that the orthodox | | | | Although a small indigenous and foreign private sector |
| arguments concerning the role of trade policy as the | | | | was left, a large public sector was created and |
| determinant of industrial performance are seen in the | | | | maintained by copper revenue and protected and |
| major role of creating price incentives. This is | | | | supported by government controlled markets. As a |
| because liberalisation and a neutral incentives | | | | result of the state controlled type of the economy, |
| structure between import substituting and export | | | | which emphasised the creation of industrial capacity, |
| activities is expected to yield both static and dynamic | | | | commercial agriculture perished and the private sector |
| effects, static in form of technical efficiency and | | | | was crowded out. |
| dynamic in the form of switching process. However, | | | | According to Turok(1979), it is commonly accepted |
| many models, both for planning and explaining the | | | | that the weaknesses of the economy, which levelled |
| development process, according to Krueger (1978), | | | | off in 1972 and then began declining, cannot be solely |
| have made a foreign exchange central to | | | | blamed on the falling copper prices, though this might |
| determination of the growth rates. This focus is on | | | | have been one of the contributing factors. This is |
| the role of foreign exchange (forex) in | | | | because, even by 1974 before the collapse of |
| complementing domestic savings needed to support | | | | copper prices, foreign exchange had started posing a |
| domestic investment. The effect on economic | | | | serious constraint on economic development. A major |
| growth will be via an increased volume of exports | | | | explanation lies in the economic policies of the day. |
| and reduced imports due to liberalisation and | | | | Despite its inheritance of highly concentrated and |
| devaluation respectively. It is argued that if trading | | | | buoyant foreign owned mining enclave, the Zambian |
| partners removed tariffs, we expect the market to | | | | government was determined to use the state for |
| expand which will ultimately lead to growth of | | | | development. The state sector share of |
| exports. Exports are also viewed as a stimulus to | | | | manufacturing output was growing almost every |
| greater capacity utilisation, greater horizontal | | | | year. Four years after Mulungushi reforms in 1968, in |
| specialisation, increased familiarity with absorption of | | | | which the government announced its acquisition of |
| new technologies transmitted through trade, greater | | | | major companies it was 53 percent of total |
| learning by doing, as a result of the increased market | | | | manufacturing output and this was concentrated on |
| size and output levels and stimulation effects of | | | | essential consumer goods required by Zambia. |
| having to achieve international price and quality. | | | | However, despite its size and scope, the state |
| Expanded market economies of scale enable a | | | | sector which included parastatals had not established |
| producer to cast or spread a “net” | | | | an integrated economy with forward and backward |
| widely on various consumers who may be helpful by | | | | linkages, parastatals, though they were import |
| sending back comments on how to improve the | | | | substitution industries (ISI) deeply depended on |
| quality of the products. Since tariffs tend to be | | | | essential inputs from abroad. The government |
| reactionary, if a country adopt liberalisation policies, its | | | | intervened extensively and imposed a number of |
| trading partners will also do away with tariffs the | | | | restrictions on the private sector, while |
| moment one country scraps trade restrictions, so the | | | | parastatals’ decisions were made by political |
| market size will expand. | | | | leaders and ministers who sat on their boards. The |
| However, Trade liberalisation alone is not an answer. | | | | parastatals were to be organised on lines of the |
| For this to be successful, there is a need to liberalise | | | | country’s philosophy of |
| the financial sector, so that exporters can have | | | | ‘Humanism’, which was coined by the |
| ready capital for re-investment; nuisance taxes have | | | | President as an African socialism. There was |
| to go, so that most of the foreign exchange earnings | | | | intervention in pricing policy, which seemed to be |
| are retained by the exporters. This creates incentives | | | | concerned more with social welfare than with |
| to them. Macroeconomic stabilisation also has to be | | | | pursuing economic development goals. |
| enforced so that inflation will not impede planning, and | | | | In 1970, barely two years after the Mulungushi and |
| if this creates confidence in investors, exports should | | | | Matero reforms capital expenditure was only growing |
| increase. | | | | at a marginal increase, while consumption expenditure |
| Pro-liberalisation economists have argued that more | | | | soared. Table 2.1 shows the higher government |
| open economies are more efficient in absorbing | | | | consumption and lower gross domestic consumption |
| exogenously generated innovations, since, without | | | | from 1964-90. Due to little emphasis which was made |
| barriers, not only will this increase the volumes of | | | | on capital expenditure, in 1973, value added in |
| essential imports, but it will also facilitate the entry of | | | | manufacturing recorded only a marginal increase from |
| new technology which developing countries are able | | | | 106 Million Kwacha to only 107.5 Million Kwacha in |
| to absorb and assimilate easily in order to expand | | | | 1976, compared to 480 Million Kwacha in 1965 a year |
| their manufacturing base. Edwards (1992), finds | | | | after independence (GRZ Economic Report, 1977). |
| strong evidence supporting the hypothesis that, with | | | | Value added by manufacturing in 1978 real terms was |
| other things being equal, more liberal economies tend | | | | 15 percent lower than 1974. Hence by the mid 1970s, |
| to grow faster than those which are not. He calls this | | | | the bells of economic doom were loud enough in |
| learning by doing type of process, “technical | | | | politicians’ ears, but pretended to be deaf. |
| progress ” where more contact with new | | | | They instead nurtured and guarded the inefficient |
| commodities and technology enhances efficiency, | | | | parastatals and the command economy. To make |
| which result in higher production. He argues that if the | | | | the situation worse, some more parastatals were |
| rate of technical progress is positively affected by | | | | created and added to the list of inefficiency. After |
| the gap between the stock of the world and | | | | 1970, a substantial part of Zambia’s economy |
| domestic knowledge with respect to the foreign | | | | was dominated by parastatal organisation, about 60 |
| source of technological improvement, then the | | | | percent of the economy in terms of GDP was now |
| country’s ability to appropriate world technical | | | | in parastatal hands. Most larger companies which had |
| innovations depends positively on the degree of | | | | been run and owned by foreigners came under |
| economic trade liberalisation. Therefore more open | | | | government control through Industrial Development |
| economies have an advantage of absorbing new | | | | Corporation (INDECO), an agency of a government |
| ideas from the rest of the world. He finds that | | | | holding company. |
| countries with more open and less distortive trade | | | | These newly nationalised companies were especially |
| policies have tended to grow faster than those with | | | | active in such industries as food processing, textiles, |
| more restrictive commercial policies. His results are in | | | | auto assembly and mining. Through large- scale |
| conformity with the catch up theory effect. Wha | | | | capitalisation, using copper revenue, these parastatals |
| Lee (1992), points out that international trade is | | | | became the pillar of the Zambian formal sector. They |
| perceived as a vehicle through which foreign inputs | | | | employed 1/3 of the workforce and maintained their |
| are provided to domestic production. According to | | | | employment levels even during the recession, for |
| him trade distortions caused by tariffs and exchange | | | | political reasons. For instance during recession, the |
| rate controls decrease the long run growth rates | | | | number of employees in private manufacturing fell |
| more significantly in a country that needs to import | | | | from 27,370 to 23,390 in 1977, about 14.5 percent |
| more. | | | | reductions, while in the parastatals they remained |
| Therefore, it can be summarised that liberalisation | | | | constant over the same period (Turok, 1979). In |
| enhances international trade which provides | | | | these parastatal bodies there were rampant and |
| comparative advantage and also provides an | | | | continuing reports of corruption, inefficiency and |
| additional source of competition to domestic firms. | | | | mismanagement, but government decided to give it a |
| Subsidies to ailing industries, no matter how much | | | | deaf ear. The Kayope Commission (1976), revealed |
| they may alleviate economic distress in the short run, | | | | catastrophic failures in major parastatals and |
| represent an effort to decelerate growth, reduce | | | | widespread misappropriation of funds, but still the |
| incentives for mobility and lock in resources in the | | | | government shelved the report, and continued to |
| inefficient industries that should contract in the | | | | give subsidies and protection to these inefficient |
| process of economic growth. | | | | parastatals. Real Gross domestic fixed investment |
| However, there is a problem of measuring the | | | | declined as there was no significant capital formation. |
| benefits of trade liberalisation, which even Kirkpatrick | | | | The emphasis was put on government consumption |
| (1995) acknowledged. Kirkpatrick admits that | | | | while the economy continued to decline. This can be |
| measuring of trade liberalisation benefits is a difficult | | | | seen in the decrease in capital expenditure which fell |
| and frustrating task. It involves two considerable | | | | in 1979 to its lowest since independence in 1964 as |
| methodological problems; it is important to assess the | | | | Table 2.1 shows. This shows that INDECO, on which |
| extent to which the World Bank’s conditions | | | | the government relied as agency of intervention was |
| have been adopted. This is because most of the | | | | performing poorly. |
| liberalisation policies of LDCs are not unilaterally | | | | At independence, Zambia’s economy had poor |
| adopted, but imposed, and therefore may lack | | | | foundation, domestic production supplied less than |
| consistency. The other problem is the assessment of | | | | one third of the local market for manufactured |
| the reforms that were implemented. It is complicated | | | | goods, while total manufacturing goods accounted for |
| by problems of separating causality from association. | | | | only 6 percent, the same setting continued even 10 |
| According to him, it is difficulty to establish counter | | | | years after independence, domestic economy was |
| factual, and separating out the effect of multiple | | | | not integrated lacking forward and backward linkages. |
| influences on economic performance. | | | | In trying to enhance domestic integration the |
| Larry Sjaastad (1982) noted that the economic | | | | government after its 1968 Mulungushi and 1969 |
| liberalisation that swept Southern cone during the | | | | Matero economic reforms bought out the private |
| 1970s and 1980s was a clear reaction to the failures | | | | share holders in INDECO which was established in |
| of preceding economics of protectionism. Uruguay | | | | 1965, but reinforced after these reforms, and |
| and Argentina, once prosperous nations had fallen on | | | | obtained a larger share of profits from copper by |
| hard times by the mid 1970s. Real per capita income | | | | means of higher taxation, which was then used for |
| in Uruguay had been declining at a rate of 1 percent | | | | public investment. |
| in 20 years. Chile, though never a prosperous | | | | |
| country, was crippled with a continuos fiscal deficit | | | | |
| and an inflation of 1000 percent. Their economies | | | | |
| were characterised by inefficient state enterprises, | | | | |
| which despite massive tariff protection, regularly | | | | |
| required subsidies to sustain their operating loses. | | | | TABLE 2.1: GOVERNMENT CONSUMPTION IN |
| Price controls, tariffs, subsidies and export taxes | | | | COMPARISON TO GROSS DOMESTIC FIXED |
| severely distorted relative prices with much of the | | | | INVESTMENT 1964-90 (IN KWACHA MILLION) |
| private enterprises devoted to production of luxury | | | | Year Government consumption Gross domestic |
| goods. Regulatory bodies administered import duties | | | | fixedinvestment |
| and quotas, interest rates, credit allocation and | | | | 1964 |
| wages. The monetary and financial sectors were | | | | 309.2 |
| dominated by the state banks with special rediscount | | | | 76.2 |
| privileges at the central bank. Their economies were | | | | 1965 |
| in a bad state. Therefore all these countries | | | | 383.4 |
| introduced liberalisation programmes in the1980s, but | | | | 120.4 |
| their results were disastrous. The Southern cone | | | | 1966 |
| experiences, according to Sjaastad (1982) are widely | | | | 435.8 |
| interpreted as evidence of the failure of economic | | | | 175.8 |
| liberalisation. | | | | 1967 |
| Zambia like Argentina, Uruguay and Chile had almost | | | | 558 |
| the same type of economic policies, with nationalised | | | | 225.8 |
| economy before the liberalisation program which | | | | 1968 |
| swept the country in 1991. Its economy was | | | | 594 |
| characterised by inefficient state enterprises with | | | | 264.7 |
| massive tariff protection in order to enhance import | | | | 1969 |
| substitution industries. Price controls, nuisance custom | | | | 589.4 |
| duties, subsidies on production and consumption, | | | | 253.6 |
| export taxes, foreign exchange controls. Private | | | | 1970 |
| enterprises had to declare all their export earnings to | | | | 717.5 |
| the central bank, as it was illegal to hold forex. | | | | 279.8 |
| Zambia, before privatisation and liberalisation, had | | | | 1971 |
| regulatory bodies to administer import quotas, | | | | 801.9 |
| interest rates, credit allocation and wages. All the | | | | 264.7 |
| macroeconomic factors were determined by political | | | | 1972 |
| decree. The monetary and financial arenas were | | | | 857.3 |
| dominated by the state banks, with special rediscount | | | | 381.1 |
| privileges to the Bank of Zambia. According to the | | | | 1973 |
| advocates of the liberal markets, poor rates of | | | | 900.7 |
| growth, massive inflation and balance of payment | | | | 426 |
| problems experienced by LDCs, and Zambia in | | | | 1974 |
| particular, during the 1970s and 1980s were because | | | | 1083.1 |
| of the rising burden of public spending through | | | | 560 |
| parastatal companies, excessive price distortion and | | | | 1975 |
| inward looking trade policies which are the order of | | | | 1241.8 |
| the day in the planned economy. | | | | 510 |
| Zambia today, according to the World Bank Report | | | | 1976 |
| (December, 1997), has the most liberal and least | | | | 1337 |
| nationalised economy in Africa. In 1991, more than 80 | | | | 483 |
| percent of the economy measured as a percentage | | | | 1977 |
| of GDP was state owned. Now, as at 1997, more | | | | 1547.8 |
| than 80 percent of the economy is in private hands. | | | | 437 |
| The one party state, which ruled Zambia since | | | | 1978 |
| independence in 1964 from the British, chose the | | | | 1789.3 |
| path of nationalisation and centralisation. According to | | | | 450 |
| the World Bank report (Dec., 1997), this was ruinous. | | | | 1979 |
| The government and international organisations such | | | | 2045.6 |
| as the World Bank and IMF believe that | | | | 65.8 |
| macroeconomic stability and growth are being | | | | 1980 |
| achieved after years of inflation and decades of | | | | 2473. |