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This essay seeks to critically analyze the statement that “Economic liberalism is a prerequisite for economic development in development economies. ” This paper will begin by outlining the concept of economic liberalization and its effect on the development agenda for Zambia. An analysis of these experiences is then made in order to derive lessons regarding the linkage between economic liberalization and economic development.
It will then draw the pros and cons; positives and negatives effects of economic liberalism in the Zambian economy and will finally conclude by establishing the way forward for developing economies.
Zambia is located in the central part of southern Africa. This country of 11. 5 million people, once among Africa’s wealthiest, long has suffered with one of Africa’s worst performing economies. Zambia’s real per capita gross national product GNP) has fallen roughly two pent per year since 1965, and was a meagre $380 in the early 1990s (Thomas P Sheehy, 1992).
Zambia had one of the world’s largest per capita recipients of foreign aid throughout the 1970s and much of the 1980s.
At independence, Zambia’s economy was mainly dependent on copper mining that accounted for 90 per cent of its export earnings (Republic of Zambia 1996).
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The leadership was committed to the promotion of economic development and restructuring the economy. The government, therefore, undertook rapid nationalization of the economy shortly after independence, paving the way for state-led development.
State intervention in the economy was set in motion with the 1968 Mulungushi Economic Reforms that allowed the government to acquire 51 per cent shares from private retail, transportation, and manufacturing firms (Republic of Zambia 1968).
The Industrial Development Corporation (INDECO), a state industrial holding company, was created to spearhead industrialization. Subsequently, the Matero Economic Reforms of 1969 resulted in the government purchasing 51 per cent shares from the mining companies, Anglo-American Corporation and Roan Selection Trust, leading to partial nationalization of the copper mining industry (Republic of Zambia 1969).
Nationalization enabled the state to control 80 per cent of the economy through parastatals involved in mining, energy, transport, tourism, finance, agriculture, trade, manufacturing and construction (Turok 1989, 78). Thus, the state became the engine of growth. However, the nationalization programmes in general, and import substitution in particular, proved very costly. Zambia failed to diversify the economy from copper mining and the import substitution strategy proved unsustainable, resulting in economic decline.
There are many reasons for the poor economic performance. Firstly, the decline in world copper prices since 1974 contributed to economic decline causing reduced government expenditure on development, including import substitution industries, inability to import goods, especially, inputs into manufacturing; balance of payment problems; and inability to service external debt. Lack of savings by the government during periods of high copper prices to cushion the impact of any fall in copper prices worsened the economic situation.
Instead of accumulating savings, the government increased expenditure on social and physical infrastructure, imported luxury goods, assisted parastatal and private companies ‘manufacturing profits’, and compensated workers with high wages, especially, mine workers. Secondly, extensive state intervention gave rise to bureaucratization, corruption and uncertainty, discouraging productive private investment and foreign trade initiatives.
Thirdly, import substitution industries proved inefficient and uncompetitive due to high input costs, high monopoly prices, reliance on government subsidies, lack of technological dynamism, and under-utilization of capacity and labour (Gwynne 1996). INDECO failed to reduce dependence on foreign imported inputs, failed to create substantial employment opportunities due to capital-intensive machinery, and catered to small urban market at the neglect of the poor majority in the rural areas (Tangri 1999, 28). More importantly, INDECO failed to advance beyond production of non-durable consumer goods to durable and capital goods.
Fourth, the bias against agriculture and rural areas meant the continued dependence on the copper mining industry. Fifth, the bias against exports and import restrictions resulted in higher exchange rates and reduced the gains from exports. Sixth, Zambia’s support for the liberation movements of Southern Africa and the closure of the border following the Unilateral Declaration of Independence by Rhodesia seriously affected implementation of development plans, as alternative export routes had to be built, especially the Tanzania -Zambia Railway.
Following the recommendations of the International Monetary Fund and the World Bank, the government undertook economic policy reforms to rejuvenate the economy from 1983. However, the structural adjustment programmes (SAPs) worsened, rather than improved the economy. Agricultural and manufacturing outputs and exports failed to increase significantly. This was attributed to the inadequate incentives for farmers due to uncompetitive exports of manufactures, high inflation, unemployment, and rising external debts.
The new government that came to power in 1991 adopted fully-fledged SAPs.
The Chiluba government implemented economic reforms more rapidly than its predecessor, or any other African government for that matter, earning the reputation of a model liberalizing economy. Such a reputation allowed the government to borrow heavily from the donor community, to offset deficient export earnings and to finance development. Zambia’s debt went up to US $7. 1 billion. As most of the national income and foreign assistance went into debt service obligations, instead of socio-economic development, public confidence in the government quickly turned into disillusionment and disappointment (Bertha Z. Osei-Hwedie, 2004).
Liberal economic policies, foreign assistance and democratization did not spur economic recovery, sustainable development and poverty reduction. The five-year privatization plan of 1993 did not go well as only 12 of the 150 parastatal companies had been privatized (Tangri 1999, 45). In spite of privatization of the copper mining industry, production and world prices declined, and have worsened since the 1990s. These and other problems of increased mining costs forced the Anglo-American Corporation (AAC) to withdraw its investment from Konkola Copper Mines (KCM) in 2002, less than two years after purchasing a majority stake in the KCM.
The pullout of the AAC from KCM, which produced 67 % of copper and cobalt exports, was a big blow to the copper-dependent Zambian economy. There are various schools of thought that support neo-liberalism in Africa. According to Nji Renatus Che (2005) these neo-liberal prescriptions are embodied in the Stabilization and Structural Adjustment Programs (SAPs) of these International Financial Institutions (IFLs)-The World Bank and the International Monetary Fund (IMF).
Concerning economic crisis in Africa, the debt burden has put African countries in a miserable position and this has created the opportunity for the Western capitalist nations and the IFLs to collaborate in imposing their neo-liberal policies on African countries. All over Africa, the ravaging effects of Neo-Liberalism as embodied in SAPs have become very apparent. The other argument concerns what was seen in the policy of Devaluation initiated by the World Bank, the International Monetary Fund and other International Financial Institutions.
Moreover the main argument brought forward by the neo-liberalists for devaluation was that, it would discourage imports while encouraging exports and therefore help in reallocating resources to farmers. But giving the inelastic nature of demand for agricultural products, this dream has not been fulfilled. On the other hand, the frustrating effects of devaluation on the wage of farmers have made them flood the world market with their products thereby further lowering the prices of their produce and increasing their woes. In fact this situation has put African farmers in an uncomfortable position as far as trade is concern.
Another significant impact of Neo-Liberalism on the African economies is the policy of trade liberalization. The neo-liberals argue that, by removing all the bureaucratic controls over the foreign exchange market, African businesses would be able to import the necessary inputs for their industries while more foreign investment would be attracted in to the continent. In addition, by abolishing government control and direct participation in the marketing of agricultural products and therefore removing the exploitative tendencies of marketing board, the increased income would be passed on to farmers thereby increasing rural incomes.
This according to the neo-liberalists would encourage increase production by the urban dwellers. The impact of this on African economies is that, the African economies continue to be situated within the neo-classical economy of comparative advantage which advocates that African countries should continue with the imperialist imposed international division of labour which placed them in the position of producing raw materials for the western capitalist countries. Those who argue that economic liberalization is not a prerequisite for economic development advance the following points.
From the sub-Saharan point of view, Privatization was seen to be another policy that SAP imposed on Africa and this too did not do any good to African economies. Given the concrete realities of Africa, privatization was seen as a tool for the promotion of neo-colonial dependency, imperialist control and underdevelopment in Africa. The manufacturing industry collapsed partly due to mismanaged privatisation, and partly due to competition from Zimbabwe and South Africa manufactured goods (Tangri 1999, 77).
Agricultural output also dropped due to drought and the government’s agricultural policies that left the producer without extension and marketing support after the abolition of marketing boards and cooperatives. Furthermore, liberalization was accompanied by corruption, which also contributed to poor economic performance. Rampant graft had permeated all the institutions of the government. There had been gross misuse of national resources including foreign assistance, mishandling of privatization, and alleged electoral fraud.
Privatization of public companies was mismanaged to an extent where those who had prior contacts with political elite in the ruling party and the government, and their international allies were allowed to purchase them cheaply, and at times without depositing the money in the government treasury or distributing it to intended beneficiaries. In particular, the privatization of the Zambian copper mines was seriously flawed. The poor economic performance had severe consequences for the entire economy.
Real per capita gross domestic product declined by more than 20 per cent in 1991-95, and the number of people living in poverty increased overtime to 73 per cent in 1996. Rural poverty stood at 83 per cent, while urban poverty was estimated at 56 per cent (Republic of Zambia, 2000). Zambia’s poor economic performance since 1991 can also be attributed to two other interrelated factors. Firstly, the political elite had no well-defined long-term policies and strategies for development.
Secondly, the excessive reliance and unconditional acceptance of the International Monetary Fund (IMF) and World Bank (WB) economic decision-making reduced the state’s capacity to develop the economy (Mengisteab and Daddieh 1999). The other negative effects of liberalization include import substitution, industrialization and export orientation through SAPs which did not promote sustainable development in Zambia. While structural adjustment had contributed to improved annual growth rates since 1991, it failed to promote viable development and compounded the debt burden.
SAPs are considered inadequate for development because of emphasis on exports of primary products (copper), yet for development to take place an economy needs to export manufactured goods and simultaneously develop domestic demand, undertake regulated liberalization and sustain growth with equity (Morrissey 2001; Mittelman and Pasha 1997). Devaluation of national currencies has also led to massive inflation, sharp reduction in public expenditures, retrenchment, cut in wages, unprecedented level of unemployment and the removal of subsidies from the social sector among other inhuman measures.
This has resulted to widespread poverty and misery. All these have not done any good to the depreciating situation that African economies have been facing over years.
The experience of East Asian economies might provide valuable lessons for Zambia’s economic recovery and development. Of particular relevance is the agriculture policy with emphasis on land reform and incentives for farmers, liberalized yet regulated industrial and financial sectors, and equitable distribution of income.
These have to be complemented with technical capacity, political will and a state that ‘governs the market’ for successful growth with equity. The policy of economic liberalization without re-orientation from copper mining to export-oriented industrialization has proved unsustainable to economic development. Consequently, the country has become one of the poorest in the world and suffers from economic decline, with little prospects for recovery. In order to achieve sustainable economic recovery, there is need for Zambia to go beyond SAPs and to pave the way for growth with equity.
The common findings clearly demonstrate the general view that while acknowledging economic and trade liberalization as a good policy that has been adopted the world over, I do not support the manner in which its implementation in Zambia was rushed. My analysis suggest that generally speaking most closures of our local industries appear to have been caused by opening up of the markets to international imports and also by the stiff domestic competition promoted by trade liberalization. Consequently, redundancies emanating from liquidations and privatization of parastatal ompanies contributed to the deterioration in the living standards of the people. This work concludes that Neo-Liberalism has done much harm to Africa. Moreover, because the neo-liberals themselves cannot solve Africa’s development problems, it is suggested that meaningful solutions have to be internally generated by the African peoples based on their unique experiences and realities. As earlier alluded to trade liberalization is aimed at creating a competitive and productive economy, which would be driven by private sector initiative with a view to enhance living standards for Zambians.
Contrary of these expectations Venkatesh Seshamani (2006) states that since the advent of economic liberalization the Zambian economy has been characterized by increased hardships among the poor, destruction of infrastructure and hence the environment. The number of firms which have been closed is higher than that of the ones that have come on board. Thus, the rate of unemployment has increased resulting in the general decline in the purchasing power of the people.
The income gap between the rich and the poor has widened resulting in increased inequality and marginalization of the poor. In summary, poverty has actually increased as opposed to the expected benefits of economic liberalization. However, notwithstanding the above shocks, since the advent of trade liberalization the Zambian economy has witnessed the emergency of small scale entrepreneurs who are mostly middlemen and those engaged in re-processing and thus providing some form of employment and income to the poor.
Economic Liberalization in Zambia. (2020, Jun 02). Retrieved from https://studymoose.com/economic-liberalization-in-zambia-essay
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