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Policy Signals and Market Responses: A 50-Year History of Zambia’s Relationship with Foreign Capital

Author(s):Barton, Stuart John
Reviewer(s):Richardson, Craig J.

Published by EH.Net (April 2016)

Stuart John Barton, Policy Signals and Market Responses: A 50-Year History of Zambia’s Relationship with Foreign Capital. London: Palgrave Macmillan. 2016. xi + 285 pp. $115 (hardcover), ISBN: 978-1-137-39097-4.

Reviewed for EH.Net by Craig J. Richardson, Department of Economics, Winston-Salem State University.

The economic fortunes and distresses of Zambia, located in Southern Africa, seem to follow a typical story arc for many sub-Saharan African countries.  As Stuart John Barton reports in the beginning pages of his book, Zambia is endowed with one of the world’s largest deposits of copper and cobalt.  Its future seemed bright in 1964 with a peaceful independence from its former status as a British protectorate. In 1964, copper accounted for 47 percent of GDP and 92 percent of export earnings. Over the past fifty years, there has been some diversification, but copper still accounts for the bulk of its economy, and 80 percent of export earnings.

Barton points out the seduction of rising copper prices, by quoting Zambia’s President Kenneth Kaunda in 1975: “To me, our greatest handicap has been the fact that during the first 5 or 6 years the world saw an unprecedented demand for copper. . . . The great inflation in the price of copper gave us the illusion we were wealthy people. Too often we spent money like newly-rich drunken men” (p. 23). Unfortunately, the hangover from the drunken wealth illusion came by the mid-1980s.  Zambia had become one of the poorest countries on earth, not only in terms of income, but in terms of net wealth. It had amassed huge public debts, equal to almost four times its GDP.

Although this book focuses on Zambia, it is a valuable contribution to an important and ongoing question: What has made some African countries fail and others succeed?  The strength of this book is that it aims to shift the focus for Zambia’s economic troubles away from forces outside its control, such as blaming it on the “resource curse” as identified in Jeffrey Sachs and Andrew Warner’s oft-cited 2001 article, “The Curse of Natural Resources,” published in the European Economic Review. Barton points out that many scholars have blamed the “deep dependency” on a single industry as a central explanation for the origin of Zambia’s downward spiral, but he argues that this is too simplistic an explanation.

The problem with these types of explanations that involve external forces and unlucky circumstances is that they are profoundly pessimistic and produce a type of passivity that calls for more foreign aid.  Certainly that is the case with Zimbabwe, in which both the government and the international aid community blamed its wrecked economy on droughts rather than calamitous land reforms that displaced thousands of productive commercial farmers. Yet it’s important to note, as Barton does in Chapter 1, that there are also African success stories that involve improving governance. Botswana’s GDP per capita in 1964 was only $441 vs. $959 for Zambia. Yet forty-eight years later in 2012, Botswana’s GDP per capita had grown by an astonishing 1415%, whereas Zambia’s GDP per capita had shrunk 17%. (Botswana now has some of the best governance indicators on the African continent, according to Transparency International.)

Barton’s central argument, thus, offers a more in-depth explanation than simple resource stories:  over several decades, the Zambian government knowingly moved away from limited regulation in markets, and towards tighter government control.  (Barton rather confusingly calls this a move towards a policy of “exclusion.”) He argues that this set off a series of unfortunate consequences:  Investors saw policy uncertainty translate into higher risk and uncertain returns.  As a result, they pulled their funds from the country. This lowered manufacturing productivity and also reduced economic growth, in some cases to less than zero. Worse was the foreign aid from the IMF, which encouraged Zambia to take on more debt rather than pursue policies that rewarded and assured both domestic and foreign investors.

To better explain Zambia’s demise, Barton relies on twelve measures of institutional quality, as proposed by Elizabeth Asiedu, which include low risk of expropriation, corruption or contract repudiation, commitment to property rights, independent courts, rule of law and low burdens on business, among others.  As an example of this deteriorating environment, Barton points out that the first hint of the change occurred in 1968, when then President Kaunda proposed an “invitation” to twenty-seven privately owned, non-mining business, to sell 51 percent of their shares to the State at book value, known as the Mulungushi reforms. Despite assurances, stocks in non-affected mining companies plummeted 54 percent in one day, with their trust shaken in the government’s future direction. In the early 1970s, Kaunda moved on to the insurance sectors, seeking to nationalize 100 percent and 51 percent of the main foreign banks. This movement away from institutional quality was papered over by rising copper prices that created flush sources of income for the government and little need to budget wisely.

By 1989, according to Barton, per capita income had fallen below its level at independence. In seventeen years as a one-party state, the government had borrowed on average “almost a half billion dollars per year to support the exclusive institutions needed to hide its failure from Zambians” (p. 129). But its new president, Frederick Chiluba, embarked on a period of economic reform measures. Rebuilding trust, unfortunately, is much harder than destroying it, and substantial inertia persisted within the administration despite his new ideas — like special economic zones that allowed streamlined and business-friendly environments to attract foreign investment.

Chiluba’s policies eventually worked.  Zambia’s slow economic slide finally turned a corner in 2001. Foreign director investment inflows eventually reached almost $2 billion by 2012, after decades of less than $250 million per year. The special economic zones attracted investment from Malaysia, India and China, and Chinese President Hu announced a Zambian-Chinese Economic and Trade Cooperation Zone in early 2007.

Zambia still appears to be lured by high copper prices and easy debt terms. A Wall Street Journal article dated March 4, 2016 details how the recent collapse of world copper prices has once again devastated the Zambian economy. Until Zambia learns the value of a diversified portfolio, its economic outlook will continue a jagged and see-saw path.

No book is perfect and there are several areas that could have been improved. First, the deep institutional details of the book are both its strength and its weakness. As noted earlier, the framework rests on making the case that “reduced institutional constraint” (e.g. worsening economic policies) led to increasing policy uncertainty, followed by lower investment, reduced productivity and finally lower GDP growth.  This model is repeated twice in the book. Yet there are precious few summary statistics that back up the theoretical mechanism hypothesized here. For example, there are eighty pages of footnotes and references, yet only three tables and four figures with statistics (aside from GDP per capita) in the entire book.

Perhaps for a second edition, I would like to see more statistical measures that back up the predictions of the central explanatory framework. One idea would be to use the World Bank’s excellent Doing Business Indicators that show changes in the government regulations affecting the business environment over time. A second suggestion would be to demonstrate more forcefully the correlation between the fall in manufacturing productivity and the increase of government control in the economy.  Using the World Bank’s World Development Indicators’ database, I generated a data series on Zambia’s “manufactured value added” (annual growth %) that could serve as a useful proxy for manufacturing productivity, since it is not available. The variable is highly volatile – with a range of negative nine percent to a positive fifteen percent between 1966 and 1996. After 1996 to the present, the variable stabilizes into a consistent positive pattern in the three to seven percent range. Adding a figure such as this would produce a vivid illustration of improving government in recent years.

All told, this is a well-researched and valuable book. With a dense bibliography and a clearly organized format, this book is heavily recommended for scholars of African economic development and others interested in the mechanisms behind economic growth.

Craig Richardson is the author of The Collapse of Zimbabwe in the Wake of the 2000-2003 Land Reforms (2004).

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Subject(s):Economic Planning and Policy
International and Domestic Trade and Relations
Geographic Area(s):Africa
Time Period(s):20th Century: WWII and post-WWII