Turning an economy around : the challenge in Zambia

NUMBER 132 * ED@ Precis n Operations Evaluation Department December 1996 Turning an Economy Around: The Challenge in Zambia For most of the period 1983-95, the biased against entrepreneurship, eco- was to help Zambia diversify its Bank's long-term objective was to help nomic recovery will take time and faces exports away from copper and Zambia diversify its economy, liberalize substantial risk. to establish efficient import sub- trade and markets, and reduce the role stitution in agriculture and indus- of the public sector. But throughout the At independence in 1964 Zam- try. At the heart of the Bank's pro- 1980s, the strategy was undermined by bia was the richest country in sub- posed reforms were measures to Zambia's policy reversals and shifting Saharan Africa. Twenty years later free Zambia's economy from the attitudes to reform and by the Bank's it was one of the poorest. It had plethora of controls on production short-term responses to the country's changed from an IBRD borrower and internal and external trade. economic crises. This crisis-driven ap- to an IDA-only client, with nearly But for most of this period the rel- proach resulted in a lending program 70 percent of its population living evance of the Bank's strategy was that focused on abundant but largely in poverty. Zambia's decline was overshadowed by the need to sta- unsuccessful structural adjustment the result of steep decreases in the bilize Zambia's economy and credits, with little investment in opera- international price of copper, high- restore its creditworthiness. tions to promote growth, improve in- er prices of oil and industrial in- frastructure, or strengthen social ser- puts, falling copper production, With Bank assistance, the gov- vices. Although Bank assistance may economic and public sector mis- ernment began reforms several have helped Zambia's economy avoid management, and postponement times between 1983 and 1986 to lib- a more precipitous decline, it failed to of adjustment, which led the coun- eralize the economy and tighten reverse the decline. During this period, try into heavy debt. The govern- fiscal policies. But each time, the poverty worsened and all major social ment's strategy of public-sector- government backtracked on re- indicators fuirther deteriorated. led industrialization supported forms or softened its policies when by tight controls and financed by the measures became politically Since a nezv, pro-reform govern- heavy borrowing exacerbated the risky. The loans, however, were ment came to power in 1991, the Bank economic downturn. By 1982 Zam- has shifted to a more balanced strategy, bia, already highly indebted, faced one that combines assistance for short- financial and economic crises. term adjustment with support for long- 'Zan,bia Country Assistance term structural reform and sector in- Bank strategy Review: Turing an Eco,ioiuy vestmenzts to promote growth and Around..4 lVo-.lrL Bank Opera- reduce poverty. The Bank is building 1980s: Liberalization overshadowed by ti oun1 t E-'1iriatio Studi,. bil this strategy around a participatory stabilization concerns tladstone Bnic,tor l7in approach that relies on governmenit Gla.stone Bonkick fotrthceomin-g. ownership, beneficiary consultation In 1981 the Bank proposed a new .1oadable to Baiik executwediret- and feedback, and donor coordination. strategy for Zambia emphasizing to?s anLd staff andl to tiit' pulblic A recent OED* study cautionis how- assistance for diversification, liber- throu.(h the Bank; Piibicat,o,,s ever that in a highly aid-dependent alization, and privatization. During Department. 1-202/458-0616. tfix country like Zambia, with years of 1983-95, the Bank committed about l -20'21522-2t62. . t'-iit booAk5d' neglected infrastructure, shortages of $1.4 billion to the country, 70 per- wkorldbanlkl oro. Prtecis written bty skills, inadequate institutional capac- cent of which was in support of FaLhll Ebtralhuni. ity, and an economic environment still structural adjus.inent. The aim  -- -~ During the 1980s, the Bank's ternal debt. All of its instruments Box 1: The Agricultural Sector structural adjustment operations served this end well: the amount Investment Program: a new shared the objective of supporting and composition of Bank lending, project approach reforms and increasing output by the quality and responsiveness of providing foreign exchange for im- its economic and sector work, and The hallmark ot the Axgricul- ported inputs. Although the opera- the nature of its technical assistance tural Sector Investment Program tions had conditions supporting and aid coordination. The Bank I ASIPt Is. participation. providing the Bank's proposed liberalization assisted Zambia in developing an deci-.ionmaking b% both the client measures, the conditions were of- adequate debt monitoring system, and beneticiaries and donors ten relaxed to ensure transfer of re- partly to facilitate the rescheduling andi other prclject supporter,. sources or were reversed after dis- of bilateral debt. During 1990-93 it The ASIP: bursement. The government was helped reschedule $1.5 billion of thus able to draw on Bank finances debt, resulting in a substantial re- * coveru the countri -'. entire ag- without following through on re- duction of debt service and consid- ricultural program, forms. The result was an increase erable debt relief. Its leadership * is prepared bv Zambian task in Zambia's debt to finance greater role in consultative group meetings forces, wvhose members are immediate consumption at the ex- coupled with its analytical work drawn tronm both the public andL private sectorc t witian pense of capital accumulation and helped convince donors to substan- is b be iiplemented future growth. tially increase their aid, helping to the in.titutional framework of the clear Zambia's arrears, enabling hrinistry of Agriculture. Forestrytn 1990s: A more balanced approach the Bank to resume disbursements and Fisheriecs: in 1991. * requires, as much as possible. In more recent years, with a standard donor procedures tor new government continuing re- Zambia's external debt remains procurement, reporting. account- forms and inflation subsiding, the one of the highest in the world, ing, and atiditing; Bank has refocused its attention however, at $650 per capita. As a * relies on short-term technical on a more balanced program. Its result the Bank will have to con- assistance, with minimal use ot strategy for the late 1990s is three- tinue to play a pivotal role in mobi- long-term expatriate consultantc; fold: (1) continue adjustment lend- lizing aid and in coordinating with * is le\ible, allowing tor annual ing to help Zambia to stabilize its donors, a task made more complex re% iews - and adjustments: andi balance of payments, (2) improve by the increasing disappointment * Is built around public sector the private sector environment of many donors with the country's reforms in the agricultural sec- through project lending in infra- performance. Since 1994, the focus tor aimed at increasing decen- structure and human resources, of aid coordination has been to im- tralization and increasing partici- and (3) target the poor and vul- prove the efficiency and efficacy pation. The program will go nerable groups with specific pro- of sectoral support by avoiding du- through sevxeral iterations with grams in agriculture and social plication, the overloading of public Input rTom farmer unions, parlia. services. sector management, and unrealis- ment and policymakers to make tic demands on local counterpart it truly participator! The Bank is also adopting a new financing. sectoral approach to program de- sign and implementation, piloted Leniding through the Agricultural Sector In- disbursed (except for the second vestment Program (see Box 1). The The adjustment operations of the tranche of the first Economic approach is expected to enhance 1980s failed to achieve their objec- Recovery Credit, which was not the relevance not only of the Bank's tives, either in effecting sustained disbursed until 1991). The com- program but also those of all do- policy reform or in improving the bined effects of devaluation of the nors and of the country. efficiency and productivity of the kwacha and reduction of food sub- productive sectors. In contrast, the sidies resulted in food shortages, Effectiveness of Bank assistance adjustment operations after 1991 rising prices, and food riots and appear to have been more success- deaths, forcing the government to Aid mtiobilization and coordinationi ful, both in their support of policy abandon the reforms in 1987. Along reform and in serving as the basis with abandonment of the reforms, The Bank's nonlending instru- for coordinated mobilization of the government allowed its arrears ments, such as technical assistance balance of payments support from to the Bank to accumulate. Between and aid mobilization and coordina- the donor community. Portfolio 1983 and 1995, arrears forced the tion, were more effective than its performance, which compared un- Bank to suspend lending to Zambia lending. Over the 1983-95 period favorably with the average for the three times, the last time for four the Bank was effective in helping Africa region for most of the 1980s, years, from 1987-91. Zambia manage its enormous ex- has also improved. Projects with December 1996  successful outcomes tended to be especially in monetary and fiscal small, require limited management, discipline. Government reforms re- Box 2: Helping vulnerable have appropriate technology, use duced the primary fiscal deficit groups: the Bank's povertv foreign consultants, and provide from 7 percent of the GDP in the assessment some training. early 1990s to 1 percent in 1995. The reforms have also made prog- .A 19344 assessment ct poverty Three factors in particular un- ress in freeing the economic envi- in Zambia identifieLd the coun- dermined the effectiveness of the ronment for the private sector. Few trv's high population growth as a Bank's assistance prior to 1991. distortions remain in the foreign major hindrance in reducing pov- exchange market, interest rates erty. The assessment. based on * Weak ownershzip. The national and have been freed, and most restric- a household survey, identified social context of the structural ad- tions on imports and exports re- lack ol productiv-e assets, such as justment program did not favor the moved. The Bank's economic and oxen. storage facilities, and farm sustainability of reforms. Outside a sector work strengthened the pol- implements for rural families. as narrow group of politicians and se- icy dialogue and helped implement the malor obstacle to greater pro- nior officials, there was little owner- the reform measures. ductiv itv of the poor. and malnu- ship of the reform process. Political trition, poor health, and low forces were sharply divided over Issues to be addressed educational lev els as the main development strategy and economic constraints ion the development management, with some influential Privatization and diversification of human capital. The assess- advisers and powerful political need greater Bank attention. Progress rnento^ main recommendat ons groups, including labor unions, still in privatization was slow before a gricultue bt imprvn favoring a command economy. 1995 but has picked up consider- holrer agracultrure ba improtehng ably sice then The goernmentrural infra,tructure andl technol- Inadequat- ably since then. The government ogy and by supporting private *Inadequate attention to the disad- passed the privatization act and es- marketing and storage. For the vantaged. Failure to recognize the tablished a privatization agency urban poor. the main objective risk of reversal of the reform pro- and trust fund. Of the 160 state- is remov ing obstacles to nmicro- cess is in part related to lack of at- owned companies eligible for sale, enterprise development. improv- tention to issues of poverty allevia- negotiations were completed on 23 ing basic urban serv-ices. and pro- tion and equitable distribution of companies and completed for only Ciding greater access to edtUca- adjustment. Thus, the government, 13 by early 1995. But by the end of tion and health. The asse,sment and by extension the Bank, did not 1995, 100 more companies had also recommended a program sufficiently recognize the impor- been privatized. Privatization of of labor-intensixve public wvorks tance of the public sector in provid- mining has been announced, and to provide a safet% net to E ulner- ing urban jobs or the immense social negotiations with bidders are ex- able groups cost of efforts to curtail the fiscal pected to begin in early 1997. deficit. Greater attention needed to be given to determining the pace of Although the share of nontradi- reform and the need to protect vul- tional exports has risen from 10 economic services. (See Box 2.) nerable groups, including the provi- percent to 15 percent of total ex- Bank assistance needs to focus sion of safety nets. ports during the last decade, earn- on Zambia's health and education ings from them are still small. systems, whose decayed conditions * Arrears and suspension of Bank dis- Growth is still constrained by in- are major impediments to poverty bursements. As already noted, three sufficient infrastructure and a lack reduction. times during 1983-95 Zambia's ar- of sustained real depreciation in rears triggered suspension of Bank the exchange rate. Bank management, in its response disbursements. The suspensions to the study, agreed with most of the undermined the viability of many Poverty and the social sectors. review's assessments and recommen- projects, particularly in agriculture. During 1983-94 poverty in Zambia dations, but not with the suggestion Better provisions for supervision increased in relative and absolute that the Bank should have forced the should have been made to mitigate terms. Nearly two-thirds of the pace of privatization earlier, or that it the effects on ongoing operations, as population lives in poverty, and should have made better provisions for well as for shutting down projects. the outlook for early poverty re- supervision or closing down ("moth- duction is not good. This suggests balling") projects during loan sus- Progress toward objectives that other strategies will be needed. pension. It noted that unltil recently Safety nets are only short-term the necessary local capacity and con- Success in liberalization measures. The more effective sensus had not developed sufficiently response will be to improve the for privatization to take off. With re- Zambia's economic management productivity of the poor and in- gard to hinidling projects during sus- improved considerably after 1992, crease their access to social and pension, management noted that the OED Precis  Bank has too often tried to resurrect justment lending as debt-service re- laic responses in articulating goals projects after a lengthy suspension, quirements areffurther reduced. On and objectives; the critical importance while Zambia would have been better the need for better risk management of borrower ownership and commit- served if the Bank had closed the exist- and sustainability analysis, manage- ment to reforms; and, in that context, ing operations and developed and ap- inent agreed that the risks of reversal the need for more expert monitoring proved new ones that better reflected and slowdown are still high and the and analysis of political realities and the new economic policies. reform process fragile. But there is also sensitivity to the political dynamics a downside risk of underfinancing the and concerns of those likely to be af- Management agreed on1 the impor- existing program, thus undermining fected by reforn; the importance of tance of job-creating growth, improved economic growth and public support. capacity building and participation public expenditures, and efficient so- Ultimately, risk will only be reduced by government officials and donors in cial safety nets for poverty alleviation by fiurther debt reduction. Bank economic and sector work; the in Zambia. It pointed to two onigoing need for an active Bank role in aid Bank-supported Social Recovery Managemenit noted that the Bank's coordination and strengthening of the Programs; to planned sector invest- ability to maneuver is limited by resident mission for that purpose; and menits in education, roads, and urbani Zambia's high debt obligations, which finally, the need to redress the balance development, whose policy frameworks force high balance of payments sup- between finance for debt servicing will particularly lhelp the poor; and port. Where countries fail to meet their and finanice for investment projects. to reforms in trade, labor, and land debt service obligations to the Bank, markets, zvhich are all designed to the Bank is legally forced to stop lend- As to the appropriate sequencing promote more labor-absorbing growth. ing and disbursemenits. Projects are of reforms in Zambia, some members A participatory monitoring system, difficult to sustain without continued support managemenit's view that established as followup to the 1994 supervision and adaptation. Manage- privatization should not have been Poverty Assessment, will track pov- menit will maintain its activist role in forced earlier, while others agreed erty rates and uwill moniitor perfor- consultative group meetings and will with OED that liberalization required mance indicators. increase cooperation with donors in- privatization, and still others noted volved in sector investment programs. that reforn of the public sector was Management noted that planned key. Where disbursements are to be adjustment operations will emphasize The Committee on Development suspended, the committee noted that reform of labor and land markets and Effectiveness of the Bank, in discuss- policy dialogue, economic and sector other constraints on private invest- ing the study, highlighted the follow- studies, and supervision should nor- ment and diversification. The Bank ing: the need for sector and country mally be continued, though in special will continue to substitute sector in- strategies to reflect clearly the lessons cases, such as civil war, even those vestment and project lending for ad- of past experience and to avoid formu- activities may have to cease. OED Precis is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. This and other OED publications can be found on the Internet, at http:// www.worldbank.org/html/oed. Please address comments and enquiries to the managing editor, Rachel Weaving, tel: 1-202/473-1719, fax: 1-202/522-3200, e-mail: rweaving@worldbank.org December 1996