Zambia: Finance, Trade - Important Links to Economic Growth

Muyatwa Sitali, The Times of Zambia (Ndola), 17 June 2008

It is indisputable that trade, either within regions or internationally, will not solve all socio-economic challenges faced by poor countries even though trade forms an integral framework through which economic development can be achieved.

It is also clear that capacities of poor governments have not developed to a level where they can exert pressure on bilateral and multilateral trading partners to have them buy into home grown national development plans.

While trade remains on top of many national development strategies, major linkages that complement successful trade between and among nations have remained ambiguous, unexplored and veiled, especially in least developed countries (LDCs).

Although the formulation of development strategies and financing for these strategies has often worked in remote, trade and trade finance are intrinsically inter-related. One cannot think of comprehensive economic development strategy with a trade component without thinking of how trade will be financed. It is further essential to realise that trade and financing for trade are an important aspect in the achievement of goal eight of the millennium development goals (MGDs).

The lack of linking these two phrases in practice has contributed significantly to the near stagnation of economic activities in many LDCs. For Zambia, total trade has remained basically unchanged since the 1990s. The share of imports to gross domestic product (GDP) has increased overtime as opposed to share of exports. In 1995 for example, the share in GDP was 35.6 per cent, it declined to 25.2 per cent in 2003. These trade figures show that Zambia has been marginalised in the world economy. Its participation in the world economy continues to decline. The 2006 UNCTAD report on exports indicates that Zambia's share in world exports declined from 0.024 per cent to 0.014 per cent in 2003.

The issue of undelivered pledges on increased Official Development Assistance (ODA) by the international community has compounded the matter as far as financing for trade is concerned. In addition, the fact that LDCs' leaders have no audacity to demand for the fulfillment of these promises, puts these low income countries, including Zambia in a precarious situation as regards trade financing and trade capacity development. With the above information in mind, how can Zambia best finance for its trade? Is it possible for Zambia to get a good deal from existing sources of trade finance?

This piece of writing analyses the performance of two forms of international trade finance namely; aid for trade and foreign direct investment (FDI) as financing instruments for trade.

The case of aid for trade is remarkable. Aid for trade involves the flow of development finance from rich to poor countries for the purpose of enhancing the world trading system. Aid for trade is a proposed package by the International Monetary Fund (IMF) and World Bank for the provision of financial and technical assistance to developing countries for two related objectives. The first is to address supply-side constraints in developing countries (maximisation of benefits) and the second is to assist developing countries to cope with adjustments in trade liberalisation which is presumed to be transitional (minimisation of cost).

But is aid for trade the way forward for Zambia? The answer largely depends on initial conditions and macro-economic fundamentals, domestic reforms which accompany the aid, delivery mechanisms, and their effectiveness and timeliness.

Zambia's current macro-economic climate, domestic reforms, trade, and export performance, make it a potentially sound candidate for a robust aid for trade package. However, the design of an aid for trade framework involves three key questions. There is the issue of 'needs' in relation to "What should be funded?" there is the element of instrument on: "In what form should the money be given?"; and an institutional aspect of: "Who should manage the transfer?".

On the issue of 'what should be funded', official documents including the national budgets have from time to time shown that significant amounts of aid goes into recurrent expenditure. Even when aid resources are channeled to capital expenditure, the country lacks efficient instruments to manage resources and eventually assess the impact of the resources on human development.

There should be a realisation that unleashing the benefits of aid for trade requires a three-pronged approach, which focuses simultaneously on the three following pillars: Pillar 1 - harmonisation with national development strategies e.g. the Fifth National Development Plan (FNDP), Pillar 2 - improvements in the international trade regime and Pillar 3 - increased and effective international financial and technical assistance (Aid and FDI). Aid is only one of the three pillars in actualisation of benefits of aid for trade, focusing selectively on aid and mobilising resources and commitments from the international community.

As emphasised in the Hong Kong Ministerial Declaration of 2005, Aid for Trade should aim to help developing countries, particularly LDCs like Zambia, to build the supply-side capacity and trade-related infrastructure that they need to assist them to implement and benefit from World Trade Organisation (WTO) Agreements and more broadly to expand their trade.

The second source of trade finance is FDI which is a financial investment in a domestic enterprise by which a foreign investor gains a significant equity stake in the firm. In most national accounting systems, FDI is defined as an equity share of 10 per cent or more. Besides selling equity, enterprises finance their operations through debt, including loans from banks and other financial institutions. It must be noted that the major players in FDI are transnational corporations (TNCs). Given the predominance of TNCs, a conventional definition of FDI is a "form of international inter-firm cooperation that involves significant equity stake and effective management decision power in, or ownership control of foreign companies"

In short, FDI is more than a flow of capital. It is a cross-border expansion of production undertaken primarily by large corporations. FDI takes place in two ways: "Mergers and Acquisitions" (M&As) that is, the purchase by TNCs of existing domestic companies, in whole or in part; and "Greenfield Investment," that is, additions to the capital stock and the creation of new productive capacity.

In Zambia, FDI has been manifested in several forms. The purchase, in part, of State owned companies such as the Zambia National Commercial Bank (Zanaco) by Rabo Bank of the Netherlands and in whole, the Zambia Consolidated Copper Mines (ZCCM) Konkola and Nchanga divisions by Vedanta of India. We have seen an influx of insurance companies such as Professional Insurance Corporation which is an example of a Greenfield investment.

However important FDI can be to a country, it is worthless if it cannot improve the welfare of the general citizenry. The expectation from FDI is that it will bring capital accumulation which leads to job and wealth creation. The 2008 budget address shows that copper production increased by 1.5 per cent to 523,435 tonnes in 2007 from 515,618 tonnes in 2006. At the same time, reports reveal that more people were employed in 2004 compared to 2006. This reflects an inverse relationship between FDI flows in Zambia and employment creation.

The pursuit of FDI as an engine of growth is a formula prescribed by mainstream economic theory, the IMF as well as other global development organisations. It holds that given the appropriate host-country policies and a basic level of development, a preponderance of studies shows that FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development. All of these contribute to higher economic growth, which is the most potent tool for alleviating poverty in developing countries. However, several studies suggest that, to capture the benefits of FDI, a country must already have reached some kind of "development threshold".

The centrepiece of a more feasible, sustainable development strategy should be the development of endogenous capacities for production and innovation. Rather than skew policies towards attracting foreign investment, macro-economic policies should aim to enhance the overall climate for investment, both domestic and foreign. Rather than encouraging FDI to flow towards export platforms for the assembly of imported inputs, industry and technology policies should aim to develop local skills, local markets, and solid, world-class domestic firms. With the right set of local-and global-policies, FDI could potentially help in that process.

Finance and trade are important engines of growth in today's economies and the Government should endeavour to meaningfully mainstream these two aspects in economic policy plans. And in working towards the achievement of MDG eight, a major element is the reform of the global financial architecture. This reform is embedded within the first target accompanying Goal eight: "Develop further an open, rule-based, predictable, non-discriminatory trading and financial system." A note under the target says that this "includes a commitment to good governance, development and poverty reduction, both nationally and internationally."

(The author is a programme coordinator at Jesuit Centre for Theological Reflection.)