Zambia - Policy options and strategies for agricultural growth

Report No. 4764-ZA Zambia Policy Options and Strategies for Agricultural Growth June11, 1984 Eastern Africa Projects Department Southern Agriculture Division FOR OFFICIAL USE ONLY U Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents 1/ Before July 6, 1983 Currency Unit Zambian Kwacha (ZK', US$ 1 = ZK 1.20 ZK 1 US$ 0.83 After July 6, 1983 US$ 1 = ZK 1.40 ZK 1 US$ 0.71 In January, 1984 US$ 1 = ZK 1.64 ZK 1 = US $0.61 WEIGHTS AND MEASURES 1 meter (m) = 3.3 feet 1 kilometer (km) = 0.62 miles 1 square kilometer (km2) = 0.39 square miles 1 kilogram (kg) = 2.2 pounds (lb) 1 metric ton (ton) = 1000 kg = 2,204 lb 1 hectare (ha) = 2.47 acres 1/ In July 1983 the official value of the Kwacha was redifined in terms of a basket of currencies of the major trading partners. The analysis in this report is based on the exchange rate regime prevailing in August, 1983.  FOR OFFICIAL USE ONLY ABBREVIATIONS c.i.f Cost, insurance and freight CSB Cold Storage Board CDW = Cold Dressed Weight DBP = Dairy Produce Board DRC - Domestic Resource Cost EEC = European Economic Community ERP = Effective Rate of Protection FESR = Foreign Exchange Savings Rate f.o.b. = Free on board GDP = Gross Domestic Product GDY = Gross Domestic Income GK Gebruder Kulenkampff GMB Grain Marketing Board GRZ Government of the Republic of Zambia IBRD = International Bank for Reconstruction and Development KAMMS Ka always Mwa Mala Services LINTCO Lint Company of Zambia LTRP Land Tenure Reform Program MAWD Ministry of Agriculture and Water Development NAMBOARD National Agricultural Marketing Board NCDP National Commission for Development Planning NMC National Milling Company NRP = Nominal Rate of Protection RDC = Recurrent Departmental Charges ROP = Refined Oil Products Limited RUCOM RUCOM Industries Limited PCU Provincial Cooperative Union SIDA Swedish International Development Agency SMP Skimmed Milk Powder TBZ Tobacco Board of Zambia TNDP = Third National Development Plan T & V = Training and Visit UNDP United Nations Development Program ZADL Zambia Agricultural Development Limited ZAMHORT Zambia Horticultural Board ZAMSEED Zambia Seed Company Limited ZNCC = Zambia Nitrogen and Chemicals Company Limited FISCAL YEAR January 1 - December 31 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  ZAMBIA POLICY OPTIONS AND STRATEGIES FOR AGRICULTURAL GROWTH TABLE OF CONTENTS Page No. PREFACE AND SUMMARY . ................... . ............ . i I. BACKGROUND . .......... ..... . ....... 1 A. Location and Transport .......... B. Overall Economic Performance ................ 2 C. Agricultural Sector Performance ...... 5 II. AGRICULTURAL SECTOR CHARACTERISTICS ... .. 10 A. Structural Characteristics ............ .... 10 B. Agricultural Development Objectives and Programs............ 15 C. Agricultural Services .... ........... ... 17 D. Evaluation of Development Programs..*.... so**. 18 III. COMMODITY MARKET PROSPECTS AND PRODUCTION POTENTIAL .. 19 A. Livestock Sector .........*. ***.....** ......... 20 B. Crop Sector. .................... 25 IV. DOMESTIC COMPARATIVE ADVANTAGE ...........37 A. Introduction ... ........... -. ..* .... . 37 B. Commodity Domestic Resource Cost.............. 38 C. Producer Domestic Resource Cost..........0.... 41 D. Net Foreign Exchange Saving .................. 42 V. ANALYSIS OF SECTORAL ISSUES AND CHALLENGES ............ 46 A. Agricultural Policy Issues ................. 46 B. Parastatal Performance ....................... 59 C. Government Resource Allocation ..... ........ 64 D. Land Tenure Issues ......... o....*........ 66 E. Challenges ..... . ... ....... .*. 67 VI. AGRICULTURAL DEVELOPMENT STRATEGY .................. 69 A. Development Options.. ........... 69 B. Sectoral Objectives ............,.. o....... 72 C. Development Strategies and Policies ......... 72 1. Strategy for Policy Reforms ........... 73 2. Strategy for Institutional Reforms ..... 77 D. Investment Program and Priorities ....0..... 80  LIST OF TABLES IN MAIN REPORT Page No. 1.1 Per Capita GDP and GDY - Selected Years ....................... 2 1.2 Sectoral Shares in Real GDP - Selected Years .... .............. 2 1.3 Recent Price Changes (annual average percentage changes) ....... 3 1.4 Index of Import and Export Prices and Terms of Trade ........... 4 1.5 Sources of Physical Growth in Marketed Agriculture, 1965-1982.. 6 1.6 Commercial Demand and Supply Prospects for Major Commodities in Zambia ...................... .. . 9 2.1 Major Ecological Zones ................................ 13 3.1 Production Trends in the Commercial Poultry Sector .... ........ 23 3.2 Production and Marketed Production of Major Grains, 1982 ....... 25 3.3 Marketed Production and Growth Rates of Grains .... ............ 26 3.4 Demand Projections for Marketed Food Grains in Zambia .... ..... 27 3.5 Marketed Production Trends in Vegetable Oilseeds .... .......... 28 3.6 Major Sources of Growth in Oilseeds ........................... 29 3.7 Tobacco Production Trends, 1964-82 ............................ 32 4.1 Comparative Average DRC Estimates by Commodity ................. 40 4.2 Comparative Farm DRC Estimates for Different Producers ........ 42 4.3 Comparative Average Farm FESR Estimates for Commodity .... ..... 43 4.4 Comparative Farm FESR Estimates by Producers ................... 45 5.1 Price Responsiveness of Producers of Selected Products ........ 51 5.2 Effective Protection Rates in Agriculture ..................... 53 5.3 Net Effective Rates of Protection in Agriculture ............... 55 5.4 Changes in Consumer/Prices Required to Cover Total Production Costs .... ......... . 57 5.5 Cost of Domestic Production, Estimated Switching Values for Export Commodities ......................................... 58 5.6 Cost of Domestic Production, Estimated Switching Values for Import Substitution Commodities .................. ......, 59 5.7 Subsidies to Major Agricultural Parastatals ............. ...... 62 5.8 Comparison Between Product cif/fob Values and Parastatal Costs .. ......................................... 64  ANNEXES Page No. 1 Table 1.1 Agricultural Domestic Product .... .............. 82 1.2 Comparative Growth of Agriculture in Selected African Countries ..... ...................... 82 1.3 Comparative Food Self-Sufficiency Ratios in Selected African Countries ................. . 83 1.4 Value of Agricultural Imports .................. 83 1.5 Major Agricultural Exports of Zambia .... ....... 84 1.6 Comparative Yields of Major Crops in Selected African Countries ................... ........ 85 1.7 Commercial Production Trends of Major Agri- cultural Commodities ......................... 86 2 Table 2.1 Government Expenditure in Agricultural Research. 87 2.2 Government Capital Expenditure in Agricultural Extension ............... . . ..................... 88 3 Table 3.1 Sources of Domestic Milk Supply .... ............ 89 3.2 Comparative Prices of Various Meats in Zambia .. 90 4 Table 4.1 Subsidies and Capital Expenditure in Agriculture 91 4.2 Use of Foreign Resources by Commodities and Producers ........ ........................ ... 92 4.3 Use of Foreign Resources by Commodities and Producers ................................ ... 93 4.4 Parastatal Involvement in Agriculture .......... 94 4.5 Provincial Distribution of Major Fertilizers for 1981 and 1982 ............. .............. 95 4.6 Government Resource Allocation to Agriculture... 96 5 Table 5.1 Changes in Producer Prices Required to Bring them in Line with Border Price Equivalent .... 97 MAPS Zambia: Existing Transport System (IBRD 17340) Zambia: Ecological Zones and Traditional Agricultural Systems (IBRD 11631R) NOTE: A Supplementary Volume on Methodology and Commodity Analyses, containing draft background working paperson which this report relies, is available separately for internal use from EAPSA.   (i) PREFACE AND SUMMARY Preface 1. This study has been prepared by a joint team of staff from the Government of the Republic of Zambia and the Bank. 1/ The Report contains analyses of past perfornance, future prospects, policy and institutional issues as well as fLtu--e strategies for development. 2/ A primary objective of the study is to identify critical policy and institutional issues that must be resolved, if agriculture were to provide a major source of future economic growth in line with the aspirations of the Government. The study is perceived as an input in the country's next two National Development Plans (1984-1993) and as a basis for other future policy statements and development programs for the sector. 2. The study would be used for coordinating Government policies and programs as well as donor participation in the sector. It focuses on issues related to marketing and pricing, parastatal efficiency, public resource allocation and land tenure. However, there are other issues constraining growth in the sector e.g., population growth etc. The major challenges facing the Government in improving agricultural growth include (i) formulating and implementing a program of policy and institutional reforms; (ii) increasing public expenditures in agriculture under severe overall budget constraints in future and against a background of benign neglect for the sector in the past; and (iii) the need to establish adequate capacity for planning and managing the sector. Summary 3. The major conclusions and recommendations of the report are as follows: (a) Zambia is facing an economic crisis which will require bold and innovative measures for structural adjustment to arrest further economic decline. The agricultural sector, which has been relatively less productive in the past, can be converted into an important source of future economic growth, provided a number of policy and institutional reforms are initiated and implemented. 1/ Consisting of Messrs. B.K. Zegge (Mission leader and principal author), A. Spurling, A. Zulfiqar (Bank), J. Graham (Consultant), F. Mwansa (MAWD) and S. Sichone (NCDP); the team was in Zambia during March 11 - April 5, 1983. In November 1983 Messrs. Zegge and van der Sluijs and Ali visited Zambia to discuss the first draft of the report with Government officials; this report reflects the comments raised during these discussions as well as those received in November 1983 from several reviewers within the Bank. 2/ Draft background and working papers on the methodology underlying the analyses of comparative advantage and providing analyses of individual commodities in terms of performance and prospects are available for internal use, in a Supplementary Volume.  (ii) (b) The poor performance of the country's economy is attributable to a number of external and internal factors; critical among the latter have been poor allocation and inefficient use of resources which have led to underutilization of existing capacity and delays in completion of investment projects. Efficiency in resource allocation and use in the public sector (i.e. Government and parastatals) deserves the highest priority under existing conditions in the country. (c) Performance in the agricultural sector has been far below the sector's potential; the critical constraints have consisted of inappropriate policies, ineffective institutions, and inadequate capacity to plan and manage the sector. Consequently, there has been a declining trend in per capita output of food (as reflected in decline of food self-sufficiency and increasing food imports) and the country has been unable to sustain agricultural output at desirable levels throughout the independence per:Lod. Agricultural export performance has been similarly poor. The major source of growth in the agricultural sector has been the commercial sector, while growth in traditional agriculture has been virtually stagnant. Much of the growth has been due to marginal increases in cultivated area, rather than change in technology (increased yields), except for wheat and soyabean. Supply and demand projections for major food commodities indicate that Zambia is unlikely to achieve self-sufficiency in major grains, dairy products and vegetable oils within the next two decades, since! this would require extremely high growth rates to be sustained. These projections are based on the assumption that there would be no significant changes in consumption or use of major grains as food and inputs (feeds) and that the proposed reforms and public investments would only have modest growth impact prior to 1990. (d) The agricultural resource base in Zambia is still considerable, since only 16 percent of arable land with reasonable potential is presently cropped annually and over 70 per cent of smallholders are yet to be brought: into the fold of improved farm technology via the extension service. (e) Since independence the Government has designed and implemented a variety of programs aimed at increasing agricultural production, but most of these have had only modest impact due to policy shortcomings (e.g. administered prices which do not take into account location and relative profitability of crops, inadequate financial resource allocation to agricultural services, etc.) and institutional inadequacies (e.g. ineffective marketing and input delivery systems, high cost parastatal and cooperatives, ineffective  (iili) agricultural research and extension, etc.). The public investment portfolio, in terms of numbers, has been excessive in relation to available resources and management capacity of the Ministry of Agriculture. A number of lessons can be drawn from the experience in Zambian agricultural development since independence. First, it is instructive that projects or programs, however well designed, cannot substitute for a well-formulated policy and projects can only achieve their intended objectives if government is fully committed to them. Second, programs which involve "spoon feeding" of producers by the state cannot be a viable strategy for promoting agricultural development in the long-run. Third, direct government involvement in agricultural production is not only an expensive strategy, in terms of capital outlays and human resources, but is often associated with high risks and uncertainty and it does not necessarily lead to increased production or productivity. Fourth, a multiplicity of programs or projects based on different strategies do not guarantee success; a much more selective and focused approach that is concentrated on providing adequate agricultural services (mainly research and extension) is more likely to achieve better results. Fifth, capacity for policy design and project implementation are essential ingredients of a successful agricultural development strategy and they should be provided in the future. (f) Zambia has developed rather complex marketing and pricing systems for farm inputs and produce which have hardly changed since independence. The main elements of this system include (1) administered pricing in which parastatals and cooperatives are generally allowed no profit margins, government subsidies are given as restitution for expenses incurred and pan-territorial pricing is maintained throughout the crop season; (ii) parastatal and cooperatives have monopoly rights to trade in controlled produce or inputs (maize, wheat, cotton, sunflower and fertilizer being the major ones). Lack of incentive for efficiency (as reflected in high "handling" costs, substantial subsidies and inefficient resource use reflect the inefficiencies that exist among parastatals) is the major issue in the existing marketing and pricing systems. These must be improved if economic import replacement and export production in the sector were to occur. (g) Zambian agriculture is generally responsive to price incentives. Most producers are effectively protected under the current pricing policy which allows parastatal and cooperative costs of transportation and handling inputs and crops to be covered by public subsidies instead of being  (iv) incorporated in the price structures. Estimated effective rates of protection are generally high even after taking into account the 17% devaluation of the currency in January 1984. The flexible exchange rate policy, introduced in July 1983, has significantly reduced the distorting (effect of the previous exchange rate policy and has provided a reasonable basis for initiating structural improvements (such as abolition of subsidies, introduction of border pricing, improvement in parastatal profitability, etc;) in the agricultural sector without undue hardships on producers. The Government should seize the opportunities thus provided to introduce structural adjustments aimed to make agriculture more efficient in the long-run, with particular reference to reduction of costs in farm product-ion, marketing and processing of agricultural product:s. Nevertheless the competitiveness of most export commodities would require sustained depreciation of the currency in real terms. The remaining major sources of distortions in the agricultural sector are the existing pricing and subsidy policies. These have also nurtured inefficiencies in the use of key inputs (e.g. fertilizer) at farm level and in the marketing and processing operations of cooperatives and parastatals. (h) The parastatal sector in agriculture has grown extraordinarily fast since independence and it has been used as an instrument to achieve specific socio-political ends. However, its performance has been quite unsatisfactory, despite the huge flow of public subsidies to the parastatal sector, particularly to marketing parastatals, in the post independence period. More public funds have been spent on subsidies than on capital investments in the agricultural sector. There is urgent need to reverse this unfavorable trend. (i) Government resource allocation to the sector has been inadequate and less appropriate than it should have been. Only 3 per cent of total annual Government expenditures (recurrent and capital) was devoted to agriculture through the Ministry of Agriculture and Water Development in 1975-1980, a large proportion of which has supported less effective government production schemes rather than providing for agricultural services (research and extension) to farmers in the country. As a result technological breakthroughs have generally lagged and the extension service has been sterile and ineffective. (j) Existing land tenure systems do not provide incentives for long-term investments in land development to increase productivity and production. Tenurial reforms consisting of conversion of customary land tenure into long-term leases, alteration of customary law of land inheritance in trust lands, and the introduction of more appropriate land rent  (v) differentials within state lands would be important for improved agricultural growth. (k) Agricultural potential, in terms of production potential (resource base), market prospects and economic potential (resource use), favors the expansion of beef, coffee, tobacco and confectionary groundnuts for exports and dairy, poultry, cassava, sorghum, maize and sunflower for import replacement. The critical precondition for such expansions would be improved efficiency in the production, marketing (through the introduction of competition in internal produce marketing and input delivery systems, leading to removal of price controls and monopoly rights of parastatals and cooperatives) and processing (through increased participation of the private sector in new and existing agro-industrial enterprises via sales of some parastatals or joint ownership [similar to ZAMSEED model]). (1) A satisfactory balance between import-replacement and export production needs would appear to be the best policy option for the country. Zambia appears to have comparative advantage in export production of beef, tobacco, coffee and confectionary groundnuts. All other crops, except production of oil-expressing groundnuts, can be competitively produced to replace imports. Comparative advantage analysis, using the DRC method, indicates that smallholder farmers followed by emergent farmers are generally more efficient users of domestic resources than larger-scale farmers (commercial and state farming). Thus smallholder farming constitutes an important economic potential for export/import production in the sector and future policies and investment programs in the public sector should be directed at maximizing this potential. Commercial farming and, to a less extent, state farming should in future be concentrated in the production of commodities in which they appear to have obvious comparative advantage, namely production of oilseeds, wheat, dairy and tobacco. The analysis also shows that direct state involvement in production, in the form of state farms, is extremely difficult to justify on the basis of comparative advantage. It is imperative that the Government consider its direct involvement in farm production on the basis of this type of analysis. (m) Medium and large-scale farming by commercial farmers and the state is highly dependent on imported inputs (fertilizer, machinery and manpower). On the basis of net foreign exchange savings rate (i.e. the rate at which foreign  (vi) exchange is saved after taking into account the expenditures in foreign exchange required in the domestic production of one unit of a commodity), its net contribution to the country's capacity to earn or save foreign exchange is relatively smaller than that of smallholder and emergent farmers. Future Government strategy to minimize agriculture's dependence on imported inputs should aim at promoting small-scale farming, while research efforts are being directed at reducing the import component of large scale farming. (n) The realization of the country's agricultural potential will require changes in existing agricultural policy and in institutions currently responsible for managing and servicing agriculture. These reforms must command Government top priority in the next few years. The major objectives of these reforms would be (i) to improve institutional and allocative efficiency in the sector; and (ii) to effect long-term and sustained growth in the sector through improved farm technological base. For this purpose a program for policy and institutional reforms, to be implemented over time, has been proposed as the core of the sector's development strategy. Policy reforms would have to be undertaken in four critical areas. Firstly, reforms in agricultural marketing and pricing policy should be implemented with the view to improve efficiency and provide adequate incentives to all participants. These reforms will consist of introduction of competition among parastatals, cooperatives and private enterprises in agricultural procurement and input delivery (i.e. removal of existing monopolistic powers and rights of parastatals and cooperatives) and a gradual removal of administered prices and subsidies (i.e. complete decontrol of prices for both inputs and products). Secondly, fiscal reforms entailing sustained real increases in allocations of public budgetary resources to agriculture would have to be implemented, particularly for increased allocations to recurrent expenditures on agricultural research and extension, and the phasing out of agricultural parastatal subsidies as well as agricultural-related producer and consumer subsidies so that the amounts normally allocated to such subsidies should be diverted to finance the increases in agricultural expenditures. Thirdly, agro-industrial policy reforms aimed to foster efficiency in agro-processing and agro-industrial activities (e.g. farm implement and fertilizer manufacture) would have to be implemented; these may entail a deliberate policy to encourage and provide incentives for increased private sector participation to permit mobilization of more individual local skills; joint-ventures with outsiders to provide financial and technical resources which would  (vii) otherwise not be available to the sector under present restrictions; and the selling to private entrepreneurs or closing down of the most inefficient parastatals. Fourthly, land tenure reforms, to be implemented over time, would need to be carried out to provide for conversion of traditional tenure systems into statutory long-term leaseholds in trust lands and for the establishment of land rent differentials which reflect comparative potential of land use, rather than the current use of land in state lands. Land tenure reforms would require a series of studies to determine land use potential and areas of priority for conversion to leases. Similarly, institutional reforms relating to MAWD and agricultural parastatals would have to be implemented. The reforms in MAWD will be intended to integrate the recent changes in the Planning Division and Department of Agriculture (research and extension) and to dovetail its functions and structures with the resources likely to be available to the sector in the future. Reforms in the agricultural parastatal sector would aim to improve their operations and resource management by providing organizational autonomy, control of resources, effective accountability and effective incentives and by instituting specific performance standards for each parastatal. Reforms in both MAWD and agricultural parastatals would require to be preceded by special studies to determine the specifics of such reforms. (o) In the short and medium term emphasis has to be placed on: (i) improving and expanding production by traditional and emergent smallholders and large-scale producers through strengthening of agricultural extension services (increased allocation of funds and better management on a sustainable basis), provision of foreign exchange for essential inputs to make better use of existing capacities in emergent farming and large-scale farming subsectors and immediate improvements in marketing and pricing (i.e. introduction of price decontrol and competition in produce procurement and input delivery); (ii) improving the efficiency of the state farm sector for which capital investments have already been made through increased funding to meet recurrent expenditure and better management. (p) In the long-term the Government would have to:  (viii) (i) expand production and commercialization of traditional smallholder agriculture through investments in agricultural research, extension, training, credit and provision of producer incentives; (ii) increasing productivity in commercial agriculture through technological changes via research!, extension and provision of producer incentives; (iii) aim at selling off or leasing state farms l:o the private sector. (r) The public investment program for agricultural development, to be included in the next national development plans, should mainly consist of: (i) Agricultural Research and Extension; (ii) Agricultural Training; (iii) Agricultural Credit; and (iv) Studies and Surveys. The fourth National Development Plan (1985-89) should specify the timing and costs of the policy and institutional reforms which have been accepted by the Government in principle but cannot be implemented immediately.  I. BACKGROUND A. Location and Transport 1.1 Zambia, with a land area of 752,614 km2 and a population of 6.2 million, has a population density of only 8.2 per km2. About 43 percent of the population lives in a 40km-wide urbanized zone (Livingstone - Lusaka - Ndola) with a density of 35 people per km2; the rest of the country is very thinly populated with an overall density of only 2 persons per km2. The urban population of Zambia has rapidly increased over the past twenty years and today Zambia is one of the most urbanized African countries south of the Sahara. These demographic characteristics have very important implications for agricultural development (para. 2.12). 1.2 Zambia, a large landlocked country, depends crucially upon its transport networks, not only because of the country's geographic and demographic characteristics, but also because imports and exports amount to about half the value of its GNP. This makes Zambia very dependent on neighboring countries for transport facilities. The cost of transportation over distances exceeding 2,000 km to the sea, whether by road or rail, is naturally high. This is exacerbated by the tendency for directional imbalance in volume of traffic of the main international routes - via Dar-es-Salaam, and via Zimbabwe/Republic of South Africa. Exports exceed imports via Dar-es-Salaam, while imports over the southern route are well above exports. This is partly a result of Government policy, which encourages the use of the Dar-es-Salaam route for copper exports. This makes the cost of imported goods, including agricultural products, very high providing "natural" protection to domestic agricultural production. Zambia's trade imbalance and geographical position, in the light of the country's potential to expand agricultural production, more than justify an agricultural policy of import substitution. On the other hand, transport problems do constrain the potential for increased production for export, except in the case of commodities with high value per unit weight. 1.3 Internal transport infrastructure is relatively well developed by African standards (IBRD Map No. 17340). The network includes more than 35,000 km of road of various standards; about 3,000 km of railways; approximately 120 airfields of various categories; and a few inland navigation facilities. Road transport is most important for the rural sector, although the network, including 4,000 km of paved roads and 8,000 km of gravel all-weather roads, has been developed to serve population concentrations and import/export traffic needs. National road density averages about 50 m/km2 and 7m/person, high by African standards. Due to the prolonged dry period (6 months) during and after harvesting, transport is relatively not a serious constraint on agricultural production in most parts of the country. However, the limited number of small trucks (within the national vehicles fleet) that are appropriate for use on rural roads appears to be a serious problem. Vehicles in Zambia numbered more than 121,000 in 1980 or an average of 2.4 per 100 inhabitants. Other transport modes are not presently important to rural and agricultural development.  - 2 - B. Overall Economic Performance 1.4 Changes in Gross Domestic Product and Income are reflected in Table 1.1. Real GDP grew at an average annual rate of only 2.3 percent from 1965 through 1974. Real income grew much more slowly. Thereafter, growth in GDP has been nil and growth in domestic income has been negative, indicating a deep and persistent recession in the economy. Since population growth has increased faster, per capita GDP began to decline after 1974. Per capita income has also declined steadily since independence, such that the 1978 averages were well below the per capita welfare measures enjoyed at independence in 1965. In 1982 per capita measures fell again with per capita income declining further to about 42 percent of its 1965 level. Table 1.1: Per Capita GDP and GNY a/ Selected Years (1970 kwacha) 1965 1970 1974 1978 1981 1982 Real GDP (K million) 1,196 1,268 1,474 1,484 1,484 1,454 Real GNY (K million) 1,290 1,127 1,241 923 918 894 Population (million) 3.67 4.16 4.70 5.31 5.84 6.05 Real GDP/capita (K) 326 305 313 279 254 241 Real GNY/capita (K) 352 271 264 174 157 148 a/ GDP corrected for changes in the terms of trade. SOURCE: Bank of Zambia, Annual Reports and Statements of Accounts 1.5 The major structural shift in the economy (Table 1.2) has been a relative decline in mining sector share from 41 to 11 percent during 1965-1982, while value added from the service sector has expanded from 32 to 51 percent of the total. Manufacturing activity grew encouragingly until 1974 but has stagnated since then, while output of the agricultural sector has failed to expand sufficiently since independence to significantly change that sector's relative share. Table 1.2: Sectoral Shares in GDP - Selected Years (% of total, Current Market Prices) 1965 1970 1975 1978 1981 1982 Agriculture, Forestry & Fishing 14 11 13 16 16 14 Mining and Quarrying 41 36 14 13 14 11 Manufacturing 7 10 16 18 18 19 Construction and other Industry 6 8 12 7 5 5 Services and Other 32 35 45 46 47 51 100 100 100 100 100 100 Source: CSO Monthly Digest of Statistics.  - 3 - 1.6 In spite of the high investment rates in Zambia, growth of both product and employment has been disappointing. To some extent this is due to the economic recession which has resulted in underutilization of capacity due to foreign exchange scarcity. However, the high capital intensity of many investments and the amount of investments devoted to longer gestation, or as yet incomplete, projects also contribute to the problem. All of these factors help to explain why Zambia's gross incremental capital output ratio (the ratio of gross fixed capital formation to changes in GDP) is so high. The ratio which was about 6:1 in 1972 had risen to about 14:1 in 1981. During this same period paid employment went from 367,900 in 1972 to a high of 393,500 in 1975 and then fell to 391,800 in 1981. The agricultural sector, which accounted for about 9 percent of total employment in 1981, recorded the highest rate of increase of new employment amounting to almost 5 percent compared to 2.4 percent in 1980. 1.7 Recent changes in prices are summarized in Table 1.3. Until February 1983, many prices in the economy were controlled by the Government, mainly as an anti-inflationary device. The controls were implemented either directly, via an administrative mechanism, or indirectly via the pricing policies of government controlled firms which compete with the private sector. Few prices accurately reflected either demand or cost of production conditions and shortages and/or surpluses wpre frequent. For wheat and maize and their derivatives, whose prices are still controlled, consumer prices continue to be set too low to permit profitable trading margins for cooperatives and parastatals. The agricultural terms of trade, which reflect the relationship between price changes in the agricultural sector and the manufacturing sector, have improved in recent years, as a result of significant increases in prices of farm produce. Nevertheless, the agricultural terms of trade are still unfavorable and would need further improvement if agriculture were to spearhead economic growth in the economy. Table 1.3: Recent Price Changes (annual average percentage changes) Average Average 1970-75 1975-80 1977 1978 1979 1980 1981 1982 Consumer Prices Low Income Group 6.9 15.2 19.8 16.4 9.7 11.7 14.0 12.5 High Income Group 7.3 13.6 17.1 12.2 11.3 11.5 10.4 13.2 Wholesale Prices All Domestically Used Goods 10.1 17.6 24.6 19.6 15.7 11.1 12.2 14.1 Deflator for Domestic Consmpt. & Investment a/ 8.1 14.9 22.7 5.2 26.2 8.1 13.7 12.8 Import Prices 14.2 20.1 14.5 20.5 27.8 27.2 20.0 23.6 Agricultural Terms of Trade b/ 0.91 0.73 0.69 0.70 0.65 0.69 0.83 0.83 a/ -he domestic demand deflator rather than the GDP deflator. The latter would include the impac_ of export and import prices. b/ Barter Terms of Trade = Index of Agricultural Producer Prices Cost of Living Index for Urban Products Source: CSO Monthly Digest of Statistics  -4- The External Sector 1.8 The crucial elements in Zambia's external sector continue to be the heavy dependency on copper exports, the large amounts of foreign exchange required for invisible imports and the low or negative net capital inflows. Copper usually constitutes 95 percent of exports. In the early 1970s, as in the 1960s, Zambia ran surpluses on the balance of trade. The continued decline in copper prices has resulted in serious balance of payments problems characterized by accumulation of foreign debt arrears and further declines in net foreign assets which have financed continuing current account deficits. 1.9 With declining reserves and quality of copper, it is imperative that the agricultural sector is strengthened and made more productive, in order that its contribution to GDP be steadily increased to compensate for the undoubted declines in contribution from the mineral sector over the medium and long-term. Without an increasing and eventually significant contribution from agriculture the future prosperity of Zambia is seriously at risk and the declines in per capita income noted earlier will accelerate. It is considered that agriculture could be stimulated to eventually generate 25 to 30 percent of GDP, but the attainment of this presents a number of considerable challenges to the Government, the most important of which will be discussed in this report. 1.10 Prospects for an early recovery in the Zambian economy are not favorable, inspite of the current world-wide recovery, in view of continued instability in copper prices, interest rates and exchange rates. Improved performance of the Zambian economy will critically depend upon improvement in copper prices and, hence, on the country's terms of trade. These have been deteriorating since 1975, mainly because import prices oF manufactured and capital goods increased faster than export prices of copper and other export commodities (Table 1.5). In 1982 Zambia's purchasing power had deteriorated to only about 26 percent of 1970, indicating the severity of terms of trade losses throughout the 1970s and into the 1980s. Table 1.4: Index of Import and Export Prices and Terms of Trade (1970=100) Import Export Terms of Year Price Index Price Index Trade Index 1970 100 100 100 1971 105 78 74 1972 111 80 72 1973 126 117 93 1974 157 134 85 1975 194 84 43 1976 217 100 46 1977 248 97 39 1978 299 103 35 1979 374 185 50 1980 486 201 41 1981 584 198 34 1982 695 180 26 SOURCE: NCDP; Economic Report 1982.  - 5 - 1.11 The foregoing analysis indicates that the poor performance of the economy is not due to inadequate levels of aggregate investment. Neither is it due to the government's lack of resolve and/or ability to rigorously pursue macroeconomic stabilization policies. Instead, major problems have been caused by the poor allocation and inefficient use of resources. These have been accentuated in recent years by the economic and financial crisis which has curtailed the availability of foreign exchange and government revenue, thus leading to underutilization of existing capacity and to delays in completion of investment projects. 1.12 In the short and medium term improved performance of the economy can be attained through improved allocation of resources to make better use of existing production capacity. However, in view of the acute foreign exchange problem which are likely to persist, it may be necessary for the Government to borrow externally for essential inputs and capital goods. In addition, the Government should institute, simultaneously, changes in institutions and policies to improve efficiency in the public and parastatals sectors; agricultural aspects are specified later (Chapter VI). This strategy is based on the realization that agricultural development in Zambia does not only depend on resource allocation and policies, but even more critically on the institutions and people who actually decide and execute them. C. Agricultural Sector Performance 1.13 The following analysis of the performance of the agricultural sector is based on official data which was judged adequate for the purpose. Trends in agricultural output are presented in Annex 1 Table 1.1. The commercial sector (marketed production), which grew at an average real rate of 5.9 per cent per annum during 1965-82, was the major source of economic growth in the sector. It increased its contribution to agricultural output from only about 19 percent in 1965 to about 41 per cent in 1982. On the other hand, the real rate of growth in traditional agriculture (subsistence production) was stagnant, at 0.3 per cent per annum during the same period and its share in sectoral output declined from 81 per cent at independence to only 59 percent in 1982. Overall real growth in the sector was 2.4 percent over the same period, which was not one of the best performances in the Eastern Africa Region (Annex 1, Table 1.2) and it was less than adequate for the economy's diversification. Growth in the sector was particularly dynamic in 1970-75, during which commercial agriculture registered annual real growth rates of between 14 per cent and 20 per cent, while traditional agriculture grew fastest in 1978-80 before drastically slowing down to a negative annual growth rate of 6.1 percent in 1981-82. A combination of good weather conditions and dramatic improvements in producer prices, particularly during 1979-80, was responsible for the commercial production upsurge. Effective protection analysis indicates that farmers were accorded significant price incentives during this period. The negative growth in the traditional sector during this period was more a reflection of the lack of effective technical and marketing support than a lack of price incentives. Growth rate in commercial agriculture declined to only 13 per cent during 1981-82, reflecting the difficulties being experienced in the supply of imported inputs resulting from the foreign exchange problem.  1.14 Much of the growth occurred in the non-food sector which registered a growth rate of about 5.5 per cent per annum. The food sector grew at an annual rate of 2 per cent, or by less than the growth in population. Thus, there has been a decline in per capita output of food. This is a major source of concern in Zambian agriculture because it has reflected the country's past inability to sustain agricultural output at desirable levels in the medium and long-run. Zambia's degree of self-sufficiency in major food crops (staple grains) has declined from 97 per cent during 1964-66 to only 79 per cent during 1978-80 (Annex 1, Table 1.3). The major sources of physical growth within the agricultural sector during the period 1965-82 are detailed in Annex 1, Table 1.7 and are summarized in Table 1.5. These include beef, poultry, wheat, sunflower, seed cotton and soyabean. Poultry, maize and tobacco have in recent years shown a declining trend, while the relatively "new" crops consisting of wheat, soyabean and sunflower have registered significant growth rates. Several factors were behind these growth rates in different commodities, mainly consisting of introduction of genetically improved technology (e.g., in commercial beef production, poultry, wheat, soyabean and sunflower); availability of land resource which permitted increase in land use (for all commodities); urban population increase which meant incremental demand for most commodities (particularly for poultry, beef, grains and vegetable oils); and price incentives which encouraged private investments in tbe production of several commodities particularly after 1978 and especially livestock products, wheat and vegetable oils). These factors are further discussed in the analysis of individual commodities in Chapter III. Table 1.5: Pattern of Physical Growth in Marketed Agriculture, 1965-82 (Per Cent/Annum) Crop 1965-70 1970-75 1975-80 1980-82 1965-82 Beef Cattle -2.4 2.0 4.6 -2.2 3.0 Dairy Milk 2.2 2.7 -0.5 4.9 1.7 Poultry Meat 50.0 22.6 -0.5 -25.5 17.2 Maize -12.9 26.1 -12.0 0.0 4.7 Wheat - 17.2 95.0 30.9 35.0 Seed Cotton 25.0 -21.9 49.3 -2.2 11.9 Soyabean - 21.9 45.3 4.2 18.4 Sunflower - 84.8 6.1 17.6 12.1 Groundnuts 2.0 14.3 -34.6 0.0 -10.3 Tobacco -17 4.4 -10.2 -29.3 -4.5  1.15 Declining food self-sufficiency means that incremental demand for food must be met by imports. The share of food imports (Annex 1, Table 1.4) in total expenditure on agricultural imports (food and inputs) declined from 76 per cent during 1965-70 to only 66 per cent in 1976-80, partly reflecting cutbacks on the importation of luxury food items (e.g. European beef, fish and fruits and vegetables for the European community in the country). The major food imports have been grains (wheat and maize) and animal and vegetable oils. On average, Zambia spent about 50 per cent of its total agricultural import bill on food during 1976-80. The decline in food self-sufficiency is a reflection of an overall stagnation in agricultural productivity under conditions of rapid population growth (estimated at 3.1% during 1969-80). Technical constraints (e.g. lack of appropriate and adaptive technical packages in smallholder agriculture) for most of the staple food crops (sorghum, cassava and maize) have led to a significant lag between agricultural growth and population increase. Unless improvements are made in agricultural productivity and production, the current population growth is likely to have more serious implications in the medium-to-long run. It would not only postpone or make impossible the attainment of self-sufficiency in food production, but also it would have important implications on the nutritional levels and hence on the health of the majority of Zambians. The problem posed by the current rapid population growth in the country and its future implications on economic development have been analyzed in a recent Bank report (Report No. 4715-ZA) which recommended, among other things, the design of a population policy, supported by family planning programs, as soon as possible. Without such a policy and measures, the food problem in the country would increasingly become difficult to resolve in the medium term, especially since current initiatives and investments in agricultural research will take a long time to bear tangible results. The implications of population increase on the demand for various agricultural products have been analyzed in Chapter III of this report. 1.16 The poor performance in the agricultural sector since independence has, undoubtedly, increased the migration to the urban areas, especially to the Lusaka and Copperbelt provinces. Although the rate of growth of urban areas has declined somewhat since the early 1960s, the absolute numbers involved are staggering. Since 1963 the urban population has tripled, meaning that an additional 1.6 million persons, or 72 percent of the total population increment, have settled in urban areas. Between 1969 and 1974 about 94,000 people per year moved into urban areas. Between 1974 and 1979 the rate had risen to about 125,000 per year. As a result, 40 percent of Zambians now live in cities or towns. The recent urban/rural income differences are a significant explanation of this urban drift. Average cash earnings of formally employed Zambians in agriculture are about K612 per year or about 35-40 percent of average wages for African workers generally. Estimates of incomes for subsistence farmers suggest that such farmers' cash earnings are about K200 to K300 per year per farm or less than half the average annual cash earnings of farm workers. These sorts of differentials cause subsistence farmers to want to become farm workers and to cause farm workers, in turn, to seek non-farm work in the urban areas. 1.17 Agricultural export performance has also been poor (Annex 1, Table 1.5) and agricultural exports have (mainly tobacco, cotton and groundnuts) accounted for less than 1 per cent of the total export value  -8- per annum since independence. In current terms, the value of agricultural exports has remained at about K12 million per year and thus it has substantially declined in real terms since independence. 1.18 In the period 1970-81, total cropped area expanded by about 2 per cent or less than 0.2 percent per annum. A large amount of this increase was confined to the production of new crops, especially wheat, soyabean and sunflower. Area devoted to tobacco shrunk by about 60 percent or more than 6 percent per annum during the same period. Increase in yields was not a significant source of growth for most crops, except for wheat and soyabean (Annex 1, Table 1.6). Maize, groundnuts, seed cotton and tobacco yields have remained virtually stagnant or have actually declined over the years, indicating in part the lack of technological breakthrough from agricultural research and/or ineffectiveness of extension. On the other hand, selection of improved varieties for wheat and soyabean improved yields at annual average rates of 6.2 percent and 4.4 percent; these were higher than the average for Subsaharan African in the period 1961-1980. 1.19 The demand (based on nutritional requirements) and supply relationships of various crops are detailed in Chapter III of this report. The main purpose here is to present the overall prospects for desmand and supply of major commodity categories in the long-run (up to 2000). These are summarized in Table 1.6 which indicates that Zambia is not likely to achieve surplus production of the major import-substituting commodities before 2000, even if the reforms proposed in Chapter VI were implemented. However, by implementing these reforms, Zambia would be in a better position to significantly increase its degree of self-sufficiency (in a nutritional sense) in the production of major foodstuffs. As indicated in Table 1.6, reaching self-sufficiency would initially require exitremely high sustained physical growth rates which are not very likely to be achieved in the medium term since the major returns from investments in research and extension may well be lagged. Also, domestic consumption of most foodstuffs (especially grains, vegetable oils, and milk products) is presently supply-constrained or is met by imports which would need to be replaced by domestic production. Zambia is therefore not likely to move from a net importer to a net exporter of major food commodities in the medium term, except in the case of poultry products, especially poultry meat in which domestic production could adequately cater for domestic demand before 1990.  - 9 - Table 1.6: Commercial Urban Demand and Supply Prospects for Major Commodities in Zambia, 1982-2000 Actual or Assumed Needed Prod. Growth Rate Growth for Self- Nutritional Domestic Deficit/ Rate sufficiency Commodity Period Requirements Prod.b/ Surplus c/ (% p.a.) (% p.a.) ----------000 Tons