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Backgrounder #884 on Middle East

February 27, 1992

Up From Poverty: Advancing Economic Development in Zambia

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(Archived document, may contain errors)

884 February 27,1992 UP FROM POWRIX ADVANCING ECONOMIC DEWLO~NT IN ZAMBIA INTRODUCTION Africa is a continent of poverty-stricken countries that 8te getting pmr every year. Zambia, located in the central part of southern Africa, is no exception. T his coun try of 8 million people, once among Africas wealthiest, long has suffered with one of Africas worst perfming economies. Zambias real per capita gross national product GNP) has fallen roughly two pent per year since 1965, and was a meager $380 las t year. To make matters worse, Zambia is saddled not only with a fareign debt of at least 8 billion, or $l,oOO for each Zambian, one of the largest per capita debts in the world but with &miorating roads and railways. Zambia also faces a potentially acute food shortage spite its capacity to produce large food surpluses.

In seeking explanations far its economic problems, Zambia must look within, far it is Zambias quarterumury experience with government-run economic policies which is causing its economic mise ry. Kenneth Kaunda, president of Zambia from the time it gained independence from Britain in 1964 until last November, transformed the free market emnomy that Zambia inherited into the kind of bloated, inefficient statist econ omy that has damned most of p ost-Independence Africa. Although Kaunda began dab bling with refonning his economy in 1982, he never went far enough to reverse his countrys economic decline. Whether Frederick Chiluba, who was elected Zambian president last October 31, can succeed where Kaunda failed depends on whether he adopts far-reaching free market reforms.

Promoting Zambia. Chiluba last week met with George Bush at the White House.

Also on his American itinerary was a meeting with the American Federation of Labor Congress of Indus trial Organizations (AFL-CIO) Ruling Executive Council in Bal Harbour, Florida, and a speech at the National Press Club in Washington. Throughout his American visit, Chiluba promoted Zambia to potential investors and unded the need for additional foreign assistance. In their meeting, Bush expressed support for chilubas movement toward a &e maritet economy.

The United States has an interest in Chilubas success. American companies have a modest yet growing business with Zambia, exporting $80 million worth of goods and seMces to.Zambia in 1990,Washington, moreover, would like tosee the success of Zambias experiment in denmracy, witnesspd by last yez~.s elecfion of Chlllrba. And Zambias experiment in democracy, witnessed by last years election of Chiluba. And Z ambia will be watched closely by many Afiicans curious about the man who toppled the seemingly invincible Kaunda. If Chiluba were to make comprehensive economic reforms and ignite economic growth in Zambia, then he and his country could become a welcome m o del for other African nations to follow. Such a model would bolster the still fragile consensus of support for fnx market economics among Africans, making the free market conversion of other African economies politically easier bia hundreds of millions of dollars in economic development aid since Kaunda began instituting a statist economy in the mid-1960s.l Although well-intentioned, this aid subsidized and prolonged the life of Kaundas ruinous economic policies.

The Bush Administration and the U.S. Agency for International Development AID which administers U.S. aid policy toward Zambia, need to reverse the mistakes of the past and pursue a free market aid strategy toward this poor country. AID already has made some propss in doing this. Along with other b i lateral donors and the Inter national Monetary Fund (IMF) and World Bank, AID has been pushing Zambia to ward free market reforms. Chiluba seems receptive to this, having taken the important step of reducing the government subsidy on consumer corn meal pr ices last December.

To assure that free market reforms take hold in Zambia, the Bush Administration should America must accept part blame for Zambias economic ills. Washington gave Zam Require AID to develop a plan for Zambias transition to a free market e conomy. This should encompass the full range of the Zambian governments economic policies: credit and monetary policy, taxation, regula tion, and property rights, among others. A comprehensive plan would give the U.S. Executive Director to the IMF,Thomas D awson, additional informa tion to assess when to use Americas IMF voting muscle to ensure that Zambias upcoming IMF-monitored free market transition program is de vised and carried out effectively Instruct that AIDS sound free market aid strategy toward E a stern Eu rope be adopted for Zambia and other African countries. AIDS technical assistance programs in Eastern Europe emphasize privatization and other free market reforms. Its programs in Zambia should be no different Mandate that AID use the Index of Ec o nomic Freedom to gauge aid to Zambia. The Index of Economic Fxeedom is a means of quantitatively deter mining the extent to which a countrys economy is a free market. It provides an analytically rigorous means of allocating resources among those countries receiving American development assistance 1 The U.S. is not alone in its complicity. Kaunda managed to make Zambia one of the worlds largest per capita recipients of foreign aid throughout the 19709 and much of the 1980s. In 1988, the US. was its tenth la r gest bilated donor, providing Zambia with approXimately 4 percent of its total foreign aid Zambias leading bilateral donors for 1988, in descending order, are Japan, Germany, Italy, Norway, Canada, and the Netherlands 2 Send Peace Corps volunteers, if inv i ted by Zambia, to promote the for mation of small businesses Stop undermining South Africas economy, to which Zambias economy is linked. U.S. economic sanctions against South Africa effectively prohibit South Africas access to IMF credit, which raises its cost for international capital. This policy enormously penalizes Zambias economy; an economi cally strong South Afiica is a necessary market for and source of Zambian goods. The U.S. should support South Africas access to credit from the Inter national Mo n etary Fund KAUNDAS POLITICAL FALL Zambia for 75 years was the British colony of Northem Rhodesia. A 1889 grant of a Royal Charter to the Cecil Rhodess British South African Company (BSAC) marked the beginning of Zambias colonial experience. The BS AC mini n g conglomerate through the Royal Charter, acquired mining rights in exchange for promising to protect the tribal chiefs in the territory of Northern Rhodesia. This Company Rule lasted until 1924, when Britain began direct colonial administration over Nort hern Rhodesia.

From 1953 through 1963 Northern Rhodesia was united with Southern Rhodesia (now Zimbabwe) and Nyasaland (now Malawi) in the Federation of Rhodesia and Nyasa land. orthem Rhodesia became the independent Republic of Zambia on October 24 1964.

Kaunda, who had been a leader of the Zambian independence movement and head of the United National Independence Party (UNJP became president of Zambia in 19

64. For eight years he tolerated political competition, and then banned opposition po litical par ties. The foundation of one-party participatory democracy was cemented a year later by Zambias 1973 constitution. The UNIP faced no political competition until December 1990, when Kaunda, responding to domestic and international pres sures, allowed opposi tion parties to organize. After considerable foot-dragging Kaunda on September 4,1991, set October 31 as the date for Zambian national elec tions.

Decisive Victory. That election was won by Frederick Chiluba, the elected leader of the 300,000-member Zambia n Congress of Trade Unions and the Movement for Multi party Democracy (MMD Chiluba took 81 percent of the vote against Kaunda, while MMD candidates won 125 of the 150 legislative seats against the UNIP and some fif teen minor party candidates. Kaunda, a f i gure with a high international profile, peace fully and graciously relinquished power after his massive defeat 2 Zambia, bordering Angola, Botswana, Malawi, Mozambique, Namibia, Tanzania, zaire, and Zimbabwe, is 290,585 square miles, sliihtly larger -Texa s 3 THE DISMAL ECONOMIC LEGACY OF KAUNDA Zambia did not inherit a statist economy. Nor did Zambia inherit a foreign debt; at independence, Zam bian foreign reserves totaled $3 bil lion A 1964 Zambian White Paper on industrial policy recommended that the go v ernment choose the capi talist road to economic development and placed considerable emphasis on private foreign investment. This was Zambias general course until 1968 That year, Kaunda denounced for eign investors as exploiting Zambia and he decnxd that Z a mbia would rely on its own resources. He also in sisted that Zambias humanist phi losophy, of which he was the chief philosopher, demanded public owner ship of property. In 1968, too, he fined his vision for Zambias future in the so-called Mulungushi Decl a ration, proclaimed in the central Zambian town of that name. The Declarations lofty aim: redistribut ing economic power in favor of the poor and the weak.

Between 1968 and 1972 Zambias predominately private economy was transformed into a predominately statist one. Kaundas most important early strike against the private sector hit Zambias crucial copper industry.

The Zambian economy is dominated by mineral, particularly copper, ex ports. Zambia, in fact, is the worlds fifth largest producer of copper, ex porting approximately 450,000 tons per year. Zambia also exports a sig nificantly smaller amount of cobalt zinc, lead, coal, and several precious minerals. While mining comprises only some 15 percent of Zambias GDP, it earns roughly 90 percent of Zambias foreign exchange and provides the Zambian govern ment with 30 percent of its revenue.

Nationalizing Industry. In 1970, the Zambian government took controlling owner ship of all foreign-owned copper companies. Revenues from Zambian copper exports in the bul lish international copper markets of the late 1960s and early 1970s were used by the government to nationalize most of Zambias industrial sector. Throughout the 1970s, Zambia Industrial and Mining Corporation, Ltd ZIMCO), the state holding company, took c o ntrolling ownership of some 140 industrial enterprises, including the Zambian Consolidated Copper Mines, Ltd ZCCM ZIMCO also seized control of Zambias hotels, real estate venues, and the countrys sole insurance company. The result: some 80 percent of the Zambian economy today is controlled by state-owned en terprises? The few areas of private-sector domination have been banking, commercial agriculm, construction, and highway transportation.

Zambias state-owned and managed industrial, agricultural, and comm ercial enter prises, like the vast majority of those throughout Africa, are economic losers. Cormp tion is rampant, accountability is minimal, and concern for economic efficiency is placed well behind political considerations. The government was far more c oncerned with putting people on the public payroll than making production efficient, The Chiluba government at present is chasing down 10,OOO ghost workers reportedly on the Zambian civil service payroll shielded by a variety of government economic polici e s designed to discourage compet ing consumer imports. An overvalued exchange rate for the Zambian kwacha, govern ment-controlled allocation of fareign exchange, import quotas, and tariffs effectively have guaranteed that inefficient Zambian state-owned pr o ducers face no sales competi tion from imports. Zambias state-owned industries also enjoy minimal competition from the Zambian private sector hs, which must contend with an elaborate array of licenses, high taxes, and subsidies for state-owned enterprises .

Generous Benefits. The economic inefficiencies caused by these economic policies were masked temporarily in the 1970s by huge revenues from copper exports, as the world price for most raw materials surged. In 1974, for example, Zambia eamed ap proximatel y $1.2 billion from exporting copper. These revenues financed generous wel fm programs. As a result, the standard of living of most Zambians grew in the 1970s as tens of thousands fled the impoverished countryside seeking not only city jobs in the growing state-owned industries, but also the cities generous care, and consumer subsidy benefits provided by the government able. Copper prices crashed some 40 percent between 1974 and 19

75. Left facing a large number of city dwellers accustomed to a lifestyle t hat his government should never have provided and certainly could no longer afford, Kaunda refused to change policies. Determined to maintain his countrys lifestyle, he borrowed heavily from for eign banks, governments, and the IMF. After it exhausted thi s foreign credit, Zambia borrowed mare money from its domestic banks in 1977 and 1978 to pay for its expen sive government programs. This government borrowing ignited an inflation rate of 16.5 percent per year in the late 1970s. Investor confidence plummet e d and private credit was squeezed, among numerous other economic ills Staggering inefficiencies in Zambias state-owned sector of the economy are ucation, health e8 This copper-financed boom of government spending, as predicted, proved unsustain 3 Afnca Re p ort, SeptemberIOctok, 1991, p. 71 4 Other than South Africa, Zambia is sub-Saharan Africas most urbanid country 5 KAUNDAS HALF-HEARTED REFORMS With the technical and financial support of the IMF, the World Bank, Britain, Nor way, and other countries, Kaun da made numerous attempts at free market economic re form starting in 19

82. Significant free market economic reform, however, did not begin until the mid-1980s. At the behest of the IMF, Kaunda in 1985 reduced subsi dies on many staple foods, cut the bloa ted civil service, decontrolled interest rates, and relaxed price controls. Without these moves, the IMF would not loan him the money to finance his growing balance of payments deficit.

Kaundas reforms were thus grudging and thus ultimately failed. Meanwh ile, eco nomic conditions continued deteriorating. One result was the December 1986 riots in the copper mining towns of Kitwe and Ndola protesting the 120 percent rise in the price of corn meal, the staple food of Zambia. In response, Kaunda proclaimed th a t Zambia would cure itself with its own economic reform program, and not the one pushed by the IMF. Kaunda reintroduced price controls, inflated the kwachas ex change rate, reimposed tariffs on imparts, and weakened many of the free trade poli cies he had introduced after 1985.

Kuandas attempt at an economic cure failed. And by September 1988 Zambia once again turned to the IMF and agreed to an aid-for-reform program. The following June the Zambian government removed price controls on all items except corn , corn meal and fertilizer. Kaunda unveiled plans in May 1990 for partially privatizing Zambias bloated state-run enterprises. That year too, he liberalized the rules on the sale of corn allowing producers to sell to private agents and millers, rather tha n requiring, as was the case, them to sell only to government-controlled cooperatives. As a result of these reforms, the IMF early last year commended Zambia for its progress, endorsing its new three year economic and financial program. This put Zambia on track to obtain new borrowing rights from the IMF, even though it was behind in its payments on past IMF loans.

Zambias good standing with the IMF lasted only until last September, when Zam bia violated the conditions of the IMF program. Kaundas principal shortcomings were his failure to make a $20 million IMF loan repayment and to meet the IMF demand that Zambias corn meal subsidy be reduced CHILUBAS REFORMS Chilubas overwhelming electoral victory came about from more than Chiluba being an alternative to Kuanda. Chiluba was elected leader of the huge Zambian Congress of Trade Unions. Chiluba also enjoyed the distinction of having resisted Kuandas at tempts at co-option after spending a four-month stint in prison on political charges in 198

1. Candidate Chiluba also had a political platform of bringing free market eco nomic reforms to Zambia. Chiluba never denounced the IMF, a common and politi cally potent tactic in Africa. He also promised to privatize state industries. Indeed, his inaugur a tion speech of November 2,1991, was Reaganesque, as Chiluba told Zambi ans: In this present crisis, government alone is not the solution to our problems. For too long, government was the problem 6 OUTSTAF After succeeding Kuanda, Chiluba tried to restore r elations with the IMF and other international donors. He promised to.dismantle all government monopolies, including building and insurance institutions. He also spoke of breaking apart and privatizing ZCCM, Zambia's state-owned and-controlled mining monop oly. Since then, dozens of state-run enterprise chief executives have been fired, including the head of ZCCM.

And of major significance, Chiluba reduced state consumer subsidies for corn meal.

Raising the price of corn meal, potentially difficult politically since Zambians have be come accustomed to cheap corn meal, is an important sign that Chiluba is beginning to control Zambia's deficit spending.

The IMF and World Bank have been pleased with Chiluba's reforms. They and other Zambian donors will meet in Paris next month to consider whether to propose yet an other IMF-monitored aid program for Zambia. As with past efforts to trade aid for re form, the donors will demand, among other reforms, that Zambia take steps to remove the state from the agricultura l sector, further reduce subsidies on corn meal, and privat ize some of ZCCM's operations ING CHALLENGES A key to economic =form in Zambia is corn production and marketing. Corn is a sta ple food throughout much of Africa, including Zambia, where it is gro wn by more farmers than any other crop and accounts for nearly 75 percent of total marketed agri cultural output. Zambian corn production was approximately 1 million tons in 1989 19

90. Until Kaunda's 1990 reforms, the government monopolized all aspects of corn production and marketing through inefficient quasi-governmental agricultural coopera tives and the now defunct National Agricultural Marketing Board (NAMBOARD).

Each year, Zambia loses about 30 percent of its harvest through mismanagement.

Another key to economic reform involves the government's longstanding policy of massively subsidizing corn meal prices for consumers. This consumer subsidy has cost the Zambian government about $400 million, or roughly 15 percent of its GDP over each of the past couple of years. The corn subsidy, moreover, is a double-edged sword.

Not only does it cost the government to subsidize corn, but the government short changes the Zambian farmer, paying him a below market price for his corn. Thus, pre dictably, farmers gro w less corn and plant groundnuts, tobacco, and other more profit able crops. Smuggling, also predictably, is common, with up to one-third of Zambian produced corn illegally exported, principally to Zaire, where it fetches some three times the Zambian dome stic price. And farmers now withhold corn from the mark t waiting until the government raises its price, or until the black market price soars.

The result this year may be severe shortages of corn. Many farmers, hurt by years of low prices, simply did not grow corn this year. Even having spent in advance its entire 1992 copper revenue to buy South African corn, Zambia faces severe corn shortages having produced only half of its normal consumption. Zambia's abundance of fertile land makes this shortage all t he more exasperating I P I I 5 "Out of Maim The Economist, October 5.1991. p. 44 7 Zambias mining industry is in sad shape. The main reason is the nation alization of the mining industry in 1970 and the takeover by ZCCM Zambias mineral monopoly, of freigh t , construction, and other unre lated industries, which drained it of operating capital. ZCCM also finan cially overextended itself by giving its workers expensive social services such as schooling, health care, trans portation, and housing The results wer e waning investment, declining production, and a bloated bureau cracy.

Even as mining production de clined, ZCCMs work force rose from 60,000 in the early 1980s to 67,000 today. ZCCM also hurt itself with its Zambianization policy.

Partly as political fav ors, Zambians were placed in ZCCM management jobs previously held by foreigners mostly Europeans, sometimes with The Distressed State of the Mining industry Zambiaa Copperbelt: With Ore Running Out, I No Longer the Engine of Economio Qrowth 1 little &gad i or ability, training, or experience. As the number of ZCCMs European workers has fallen from 72,000 in 1964 to roughly 8,000 today, ZCCM now suffers from a serious shortage of technical, particularly geological, skills. Corruption in ZCCM, meanwhile, has been rife as well. It was reported over this past summer that ZCCM was being milked by top executives in a multi-million dollar copper scam dat ing back to the early 1980s.

Unless these drags on Zambian mining efficiency are minimized, the Zambian econ omy will be crippled by dramatically reduced levels of copper production. By the end of this decade, several of ZCCMs copper mines will have exhausted their known re serves. Zambian copper production could drop to less than half of its current level 0 THE DI R E NEED FOR REFORM Despite its dreary past, the Zambian economy shows some signs of hope. In 1987 the H.J. Heinz Company of Pittsburgh expressed a strong interest in acquiring major equity participation in Refined Oil Products, a major Zambian state enterp rise. Zam bian agriculture and livestock have demonstrated strong export potential to neighbor ing countries when Kaunda allowed the kwacha to be devalued in 19

87. Similarly, a 1989 devaluation resulted in a 25 percent increase of non-mining exports. The devalua tion of the kwacha makes Zambian exports more competitive as potential importers re ceive more kwacha for a constant amount of their nations currency. And Zambian price decontrols in 1986 resulted in the greater availability to consumers of soap c ook ing oil, and other basics that no longer were smuggled to neighboring countries.

Still, sweeping and immediate fke market reforms are necessary if Zambia is to begin growing economically A gradualist or piecemeal approach to reforms, as tried off and on by Kaunda, is bound to fail. Privatization, for example, dues not work well unless prices are free to reach market value.

Political Pressures.The political pressures on Chiluba also dictate that he move quickly on comprehensive reform. The slower he goes the more time opposition groups, primarily those in Zambias cities, will have to co alesce. A rejuvenated UNIP Kaundas old party, and other parties are mobilizing to oppose Chilubas modest re forms.

The precipitous drop in Zambias future copper production is another reason to move quickly on reform. Zambian copper mining revenues will de crease even in a best case scenario. This makes it essential for the Zambian economy to diversify, so that a strong agricultural sector replaces copper as .the backbone of the Zambian economy.

The sooner that additional free market reforms am brought to Zambian agriculture, the less damaging will be Zambias declining copper revenues.

Zambia, most of all, must unleash the considerable but long-repressed entrepreneur ial energies of its people. Chiluba must privatize Zambias economy and eliminate price cont rols and excessive regulation burdening private enterprise, and otherwise rel egate the governments role to that of facilitating a Zambian free market Greater Forelgn Trade is a Key to Reform Foreign trade is critical to a country with a Zambian-sized int e rnal market, with its minimal economies of scale and limited potential for domestic competition. Yet trade among southern African countries accounts for only 5 percent of these countries total trade. Rather than trading with each other, southern African c o untries trade with the in dustrialized countries In 1990, Zambian exports totaled approximately $395 million to Japan 172 million to France, and $91 million to Italy. Most of these exports were copper In contrast 6 million worth of Zambian goods were sent to neighboring Zaire. This same year, Zambian imports totaled 166 million from Britain 104 mil lion from Germany, and $80 million from the U.S. Imports from Zaire, as reported by official statistics, were practically nonexistent. While this low level of t r ade among southern African countries is due in large part to these economies producing raw mate rials and cash crops in demand only by industrialized economies, there is no doubt that trade within the southern African region is artificially depressed by g overnment trade restrictions affecting commerce in products, particularly food and consumer goods, for which there is a potentially vibrant regional market.

Unofficial Trade.Much of Zambias trade problems stem from the political cam paign against South Afr ica At its formation in 1980, the Southern African Develop ment Coordination Conference (SADCC a political and economic association of ten southern African countries to which Zambia belongs, announced that its member states 6 6 Smuggling of subsidized con s umer goods has resulted in chronic shortages of many essentials in Zambia 9 would end their economic dependence upon South Africa? In the early 1980s, some 64 percent of Zambias imports and 20 percent of its exports passed through South Af rica. The SADCC states attempted to improve their roads and railways to reduce their dependence on South Africas transportation network. By 1987 Zambia claimed to have rerouted all of the copper exports that had previously passed through South Af rica. That year too, Zam b ia began denying impart licenses for items originating in South Africa. Although unofficial Zambian-South African trade continued Zambias attempts to distance itself from South Africa cost its qonomy several billion dollars in lost economic growth and hig her transportation costs bia can immediately and significantly improve its trade relations with South Africa.

Chiluba, in fact, recognizes South Africa as a regional economic giant that must play a significant role if the much needed economic integration o f the southern African re gion is to advance. Indeed, South Africa accounts for three-quarters of the regions total GDP. Chiluba announced last November 7 that Zambi would begin moving to ward establishing official trade relations with South Africa. South Africas Gencor in dustrial conglomerate meanwhile is considering investingin Zambian mining If this opening to South Africa continues it would complement very well an internal policy of free market reform While improvements in southern Africa regional tra d e may be slow in coming, Zam 8 UP FROM POVERTY America has an interest in the economic development of Zambia. Were Chiluba to bring free market economic prosperity to Zambia, Africa would have a sorely needed model of democratically-engineered, free marke t success. This model would bolster the still fragile consensus of support for free market economics among Africans, mak ing the free market conversion of other African economies politically easier. Were free markets to spread through Africa, the result wo u ld be not only the potential growth of African markets for American goods and services, but a step toward getting Washing ton out of the international economic development business, which last year cost the U.S. well over $1 billion in grants and aid that has done little to stop the economic mis ery in much of Africa.

To assure that fxee market reforms take hold in Zambia, the Administration should Require AID to develop a plan for Zambias transition to a free market economy The U.S. Agency for Internation al Development mission in Lusaka, Zambias capi tal, should draft a comprehensive plan for the free market transition of the Zambian 7 SADCC members are Angola, Botswana, Lesotho, Madagascar, Mozambique, Namibia, Swaziland,Tanzania 8 Africa News, January 2 1 ,1991, p. 11 9 Trade statistics between South Africa and Zambia have been treated confidentially. According to South African Zambia, and Zimbabwe sources, Zambia imported goods from South Africa worth approximately $180 million, and exported $2.2 million w orth of goods to South Africa in 1991 10 economy. This plan should assess and encompass the full range of the Zambian governments economic policies, including credit and monetary policy, taxation, gov ernment spending, regulation, wage and price controls, trade practices, foreign ex change allocation, and treatment of property rights. This plan would be useful to Amer ican officials dealing with the IMFs policy toward Zambia.

The U.S. Treasury official who advises the U.S. Executive Director to the IMF on how to bring Americas significant voting power to bear on approving proposed IMF aid for reform packages is responsible for seven African countries in addition to Zam bia. The U.S. Executive Director to the IMF meanwhile has only three staffers, each whom is responsible for devising Americas IMF policy toward approximately 50 countries. As a result, U.S. officials at the IMF responsible for policy toward Zambia must rely primarily on the IMFs own advisory team in Zambia. The U.S. has little manpower and in dependently generated data with which it can critique and influence the agreement being negotiated between Zambia and the IMF, World Bank, and other donors.

Washington has been troubled by some previous IMF-monitored aid programs. The IMF, for instance, so metimes impedes the pace of privatization in developing coun tries. This was the charge leveled by Pakistani Finance Minister Sartaj Aziz at last Octobers IMF-World Bank meetings in Bangkok. Similarly, Czech and Slovak Fed eral Republic Minister Vaclav Kl aus last October complained that IMF and World Bank advisors were romoting the very discredited statist policies that his country was trying to abandon.

A well-researched AID pmgram for Zambias transition to a free market economy would enable the U.S. Exec utive Director to the IMF to exert maximum influence on the IMF and thus to minimize the chances of Zambias economic reform being stunted by a less than comprehensive IMF program for Zambias transition to a free market economy lop Instruct that AIDS sound free market aid strategy toward Eastern Eu rope be adopted for Zambia and other African countries AID is assisting directly the free market reform of the East European economies.

Example: AID contractors since last September have been assisting the sale of Polands state-owned LOT Airlines. This work has included the appraisal of LOTS as sets, the development of a privatization plan, and a search for potential investors.

Example: AID contractors, beginning last September, prepared the Czechoslova kian fm P ilzen Skoda for privatization. This work, which included reviewing past and cumnt accounts and the implementation of proper financial systems, resulted in major segments of Pilzen Skoda being sold to private investors.

Example: AID contractors are preparing to assist Albania, Bulgaria, Estonia, and Romania reduce legal and procedural barriers to trade and investment and improve their contract law 10 Insight. November 17,1991. p. 15 11 The economies of Africa and East Eu r ope have much in common, including a lim ited window of opportunity for effective economic reform. Both Zambians and Poles for instance, may have a limited tolerance for the pain that inevitably accompanies the comprehensive restructuring of statist econo m ies. This has been demonstrated in Zam bia, where 1986 riots over food prices derailed free market reforms. While Chiluba, un like Kaunda, may be committed to a free market reform program, his time to act is lim ited. AID thus must do what it can to make Chilubas privatization and other economic reform programs work.

Using its East European programs as models, AID could help overcome obstacles to privatization in Zambia. The Zambian legal and tax systems, for example, need to be reformed if privatization i s to succeed. U.S. experts could work with Zambian officials to change Zambian laws that prohibit private enterprise and to lower or abolish and taxes that smother it. The Mines and Minerals Act, which regulates the Zambian min ing sector, requires an ove r haul to make private investing in Zambian mining more profitable. While World Bank staffers are aiding Zambia in privatization and trade re form, Zambia could use U.S. technical assistance with the complexities of tariffs, finan cial transfers, and taxati on policies. And U.S. fmancial experts could help Zambia es tablish a stock exchange, which could be used to help sell state-owned enterprises to private investors.

Restructuring AIDS policy toward Zambia along the lines of AID programs in Eastern Europe would require no more than AIDS present expenditures on Zambia.

AID last year spent approximately $20 million in Zambia. AID spending this year in Zambia could be considerably higher, in the $30 million range. Current AID programs include $10 million to pa y off Zambias IMF debt and to assist Zambia with its bal ance of payments deficit. Approximately $2 million is to prevent the spread of AIDS and $1 million to manage wildlife preservation programs. An agricultural assistance program costs approximately $1 0 million per year. While this agricultural program does assist private sector enterprik, the money would be better spent on transforming Zambias economy fundamentally and rapidly by attacking the governments owner ship and regulatory grip over it Mandate that AID use the Index of Economic Freedom to gauge future aid levels to Zambia AID should make aid to Zambia contingent on progress toward free market reform.

AID should examine Zambias policies on credit, taxes, government spending, regula tion, wage and price controls, free trade, protection of private property rights, and for eign exchange controls. Taken together, these economic indicators could become a pro totype for an Index of Economic Freedom, a quantitative gauge of a countrys progress in develo p ing a market economy. As a pilot project for all Africa, the Index for Zam bia later could be refined by AID and applied to all African countries receiving aid from the U.S. Such an Index, in fact, already has received considerable attention in Congress a n d at AID economic ref measuring, for example, the amount of the governments corn meal subsidy, involvement in mining, and interference with foreign trade. If Zambia makes progress removing its corn meal subsidies, its Index score, to be determined yearly w ould increase, leading AID to favor Zambia in future foreign aid allocations. If, on The Index of Economic Freedom for Zambia would score Zambias progress toward 12 the contrary, it scores poorly on this or other aspects of reform, Zambias Index score wou ld be lower and Zambia would have its U.S. aid reduced or even eliminated. A low Index score by Zambia could prompt Washington to reduce U.S. support for IMF or World Bank assistance; a high-score could prompt greater U.S. support.

Common Standard. The lon g-pending 1992 Foreign Aid Authorization bill, if en acted by Congress, would require AID to develop a series of factors that provide a common standard for evaluating and comparing recipient countries progress in adopt ing economic policies that foster in dividual economic freedom. The Index of Eco nomic Freedom, cited in this bills report, should be used by AID in developing this se ries of factors to make this much-needed evaluation and comparison.

AID already has experience with a version of an Index of Economic Freedom. In a 1989 report entitled Development and the National Interest: U.S. Development Assis tance into the 21st Century, AID economists developed a policy matrix comparing the economic policies of 42 developing countries. This comparative ma t rix, called an Eco nomic Opportunity Index, allowed AID to demonstrate that free markets produce higher rates of economic growth. Singapore, for example, with its years of booming economic growth, scored in the 90s (on a scale of 100) on AIDS Economic Opp o rtu nity Index; developing countries suffering from economic decline, like Congo, Guinea and Mali, typically scored in the 20s. AIDS experience with its Economic Opportunity Index confirms that an Index of Economic Freedom, which measures essentially the same factors, is feasible and that free market economies maximize economic growth.

It is AID policy to give priority to developing countries that are promoting fm market reform. Had it further developed and refined the Economic Opportunity Index AID today would have a superior means of allocating resources among those countries receiving American development assistance. AIDS history of providing development assistance to countries unwilling or unable to bring about the required free market eco nomic reform s demonstrates that it needs the discipline of an Index of Economic Free dom. This discipline is owed to the American taxpayer. It also would be good for Afri cans; the longer free market reforms are delayed by poorly designed foreign aid, the more painful will be the establishment of a free market Send Peace Corps volunteers, if invited by Zambia, to promote the for mation of small businesses Of the approximately 1,400 Peace Corps volunteers in Africa, some 140 are part of the Peace Corps Small Business Pr o gram, which consists of volunteers experienced in accounting, purchasing, quality control, business management, financial analysis, and other areas helpful in developing small businesses. In the west African nation of Mali for example, Small Business Prog ram volunteers work through the local Chamber of Commerce to organize and teach accounting and marketing courses for small business owners.

While the Small Business Program in Africa makes much sense, the Peace Corps so far has been far too timid in promot ing free markets in Africa. In Poland, by contrast the Peace Corps Small Business Project gives municipal governments privatization ex pertise. The Peace Corps Small Business Program should do the same for Zambia and other African countries 13 If the Peac e Corps is invited into Zambia, and the Chiluba government has demon strated a commitment to foster private sector activity, then the Peace Corps should bring small business expertise to Zambia. The Peace Corps could provide would-be Zambian entrepreneurs w ith basic business skills. Peace Corps volunteers also could help privatize Zambian state enterprises, much as they have done in Poland 4 Stop undermining South Africas economy, to which Zambias economy is linked An economically strong South Africa is cru c ial to the economic development of Zambia and the entire southern Africa region. Chiluba has recognized South Africas importance by beginning to reverse Zambias economically damaging policy of re straining Zambian-South African trade. Chilubas action will benefit the Zambian economy. Moreover, further economic warfare by Zambia and others against Pretoria only will create the economic and political turmoil that could slow South Africas al ready precarious transition toward majority rule.

Yet, Washin ton co ntributes to this turmoil by keeping economic sanctions against South Africa. The 1983 Gramm Amendment to U.S. Public Law 98-181, named after then Representative Phil Gramm of Texas, requires the President to instruct the U.S. Executive Director to the IM F to oppose South Africas request for IMF credits.

Such American opposition is influential, if not decisive, in denying South Africa credit.

Ironically, all the apartheid-related conditions enumerated by U.S. Public Law 98 181 for South Africa regaining a ccess to IMF credit have been or are close to. being met. These include a determination by the U.S. Secretary of the Treasury that IMF credit to South Africa, among other effects, would reduce substantially racially-based restrictions on labor and mobilit y, and would benefit economically the majority of South Africans. The Iemaining stipulation is that South Africa run a balance of pay ments deficit.

As a country with what is a developing economy by many standards, including a 40 percent unemployment rate, South Africa would like to stimulate economic growth by raising imports and consequently running a balance of payment deficit in the short to medium term. Access to IMF credit would reduce the cost of financing these deficits.

Without South African access to IMF credit, commercial lenders rate South African loans as higher risks, thus increasing South Africas cost of borrowing international capital. This is an additional and unneeded burden on any economy.

Zambias economic deve lopment than would any amount of foreign aid. Washington should recognize this and stop hurting Zambias economy indirectly for the sake of what anyway is an obsolete South Africa policy. South Africa should be given diplo matic assurances of American supp o rt for reinstituting its access to IMF credit should it run a balance of payments deficit. It is foolish to assist Zambia with one hand and hurt it with the other while contributing to South African destabilization in the process IF A healthy, trade-orien t ed South African economy would do more to promote 11 Additionally, over 100 state and municipal governments have sanctions against South Africa 14 CONCLUSION I Zambias new president, Frederick Chiluba, offers new hope for Zambia-and Af rica. Were Chiluba to bring free market economic prosperity to Zambia, Africa would have a compelling model of democraticallyenginered, free market development suc cess.

Though Zambias deep economic wounds are primarily self-inflicted, America has a role to play in assisting Zambia and other Afiican countries grow economically and raise living standards by developing free market economies. An Index of Economic Freedom, used in conjunction with IMF economic reform programs, would provide long-needed means of gauging this comm itment to a free market economy. Not only would an Index help to assure that American development assistance dollars are wisely spent it would prod Afiican countries toward the free market.

Zambias movement toward a free market will begin yet again as a ne w IMF-moni tored structural adjustment program is developed for Zambia over the next couple of months In the process, Washington should exert maximum leverage to assure that this reform program brings Zambia to a free market in a comprehensive and rapid f ashion.

An AID-drafted plan for the free market transition of the Zambian economy would be a weapon to combat any less than comprehensive IMF programs for this transition Economic Revival. East European-style AID and Peace Corps programs aimed at di rectly transforming the Zambian economy, including assistance with free market bank ing and tax reforms, would be appropriate for Zambia. Lastly, Americas abandonment of its opposition to South Africa regaining access to IMF credit would assist Zambia by contri buting to the revival of the important South African economy.

The free market revolutions underway in the former Soviet Union and Eastern Eu rope have forced the U.S. to redesign its aid policies toward these regions. The same should happen for Africa Deca des of foreign aid from America and elsewhere, no mat ter how well-intended, have done little to eliminate poverty in Africa. Now that free markets are struggling to be born there, America can help by restructuring its aid pro grams to give Africans the s ame economic freedoms as are being won by Russians and East Europeans.

Thomas P. Sheehy Policy Analyst 15

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