Zambia and the IMF

Liam L. Liu
Economic Anthropology
Prof. Chattaraj
10/29/2012

The Zambian Economy and the IMF

One of the most concerning trends in developmental economics is the study of the performance of the economies of developing countries. Many developing countries such as Zambia are often cited as being very poor. This statement has caught the attention of many people. While the public is very much aware of Zambia’s poverty, it may not have much knowledge about the intricacies of the Zambian economy, and how precisely it was shaped by IMF (International Monetary Fund) actions. Some scholars have intended to create an understanding of the Zambian economic situation in relationship to the IMF, especially in the time period between the Zambian economic crisis that started to occur in the mid-1970s until the early 1990s when liberalization policies1 implemented by the government under the auspices of the IMF (International Monetary Fund) produced noticeable impacts on the Zambian economy and the well-being of Zambians.2 I will frame the discussion of different scholars to reflect on the economic conditions prevailing in Zambia and highlight its interactions with the IMF. In regard to Zambia’s economic condition, I find that the authors share the same premise that the IMF measures had an impact on the declining Zambian economy.

Before I can discuss the impact of IMF policies on Zambia, I will provide some context by describing the immediate cause of Zambia’s economic decline and discussing the reasons for concern about this situation. There is a consensus about the fact that the decline of the Zambian economy is immediately caused by the decline in the copper prices in 1975, anticipating the IMF stabilization programs3. The demise of the Zambian economy in the mid-1970s is caused by poor economic management, the fall in the copper prices and the oil shock that marked the global economy (Hansen 2000, 84). One of the consequence of the falling copper price was that the the fall in copper prices reduced the value of commodity exports by over 40%, which has a weakening effect on the overall economy (Karmiloff 1990, 298-299). Furthermore, the Zambian economy was vulnerable, because it was heavily dependent on copper as a sole export material, therefore, reacting heavily to price fluctuations (297). The vulnerability of the Zambian economy is highlighted by the fact that since copper consists of roughly nine-tenths of the Zambian export earnings, the terms of trade of copper, which fell by 50% in 1975, played an enormously important role for the viability of the Zambian economy (Makgetla 1986, 395). Due to the fall in the copper prices Zambia’s terms-of-trade has become the worst in Africa (Wulf 1988, 579). The subsequent fall in the copper prices that were reduced in half between 1970 and 1990 proved devastating to the Zambian economy (i). The fall of the copper prices coupled with dramatic oil price increases following the oil shock immediately exhausted Zambia’s foreign exchange reserve within a few months, restricting its policy options and making it dependent on foreign loans, and thus subjecting it to future IMF intervention (Simutanyi 2006, 4). Some have criticized the post-independence Zambian development strategy for relying too heavily on copper exports to generate tax revenues to fund domestic industries, provide public-sector employment and grant services to citizens (World Bank 1994, i). Zambia’s structural economic predicament is also described as a “syndrome that is most typical of a small primary exporting developing country [i.e. Zambia] in today’s economic environment” (Wulf 1988, 579). This predicament encompasses the vicious circle of economic deterioration that follows a fall in export values and a fall in imports for production that reduces investment spending. This process increases foreign borrowing, which further drains available investment capital and weakens the economy (579). In any case, the fall of the copper price inhibited the successful execution of an effective manufacturing strategy, as most of the manufacturing investments were based on the receipt of plentiful copper revenues (Hawkins 1991, 841). An already weak manufacturing sector amid a weak economy can not contribute positively to manufacturing development, which inevitably keeps the country poor (Karmiloff 1990).

I will now describe the circumstances under which the IMF structural adjustment program was implemented over the course of the 1980s, and will also outline briefly what the program is all about. The structural adjustment policies derived from the Zambian need for loans following the fall in the copper prices (Makgetla 1986, 395, Hawkins 1991, 844). Since most of the Zambian companies became very unprofitable, they relied on the government borrowing money from abroad in order to continue the operations of the companies. The increasing debt burden eventually became very unmanageable. The long-term debt service ratio increased from 5.5% of the value of national exports in 1970 to 18.6% in 1980. Zambia subsequently fell behind on its repayment obligations by 1975 (Karmiloff 1990, 301). Therefore, Zambia required the financial support of the IMF that was willing to increase lending to Zambia, but only in exchange for increasing preconditions to further lending (Hansen 2000, 86). These preconditions are summarized under the heading of the “structural adjustment program” that was implemented in several steps over the course of the 1980s (Simutanyi 2006, 5). The main objective of IMF policies include a de-controlling of prices, a flexible exchange rate system, an improved foreign-exchange budgeting and import licensing system, a reduction in the government budget deficit and expenditures (including social spending), an increase in taxes, a reduction in government employment, and cuts in wages and salaries (Wulf 1988, 582; Karmiloff 1990, 303; Hawkins 1991, 844-845). These IMF policies were working counter to the previous Zambian policy of using government funds to support full employment and state industries. With the implementation of the structural adjustment program the prevailing Zambian developmental model based on a strong public sector (i.e. government involvement) that subsidized the urban, industrial working class collapsed . The government deregulated the parastatal companies4, allowing these companies to lay off workers in times of crisis (Hawkins 1991, 843-844).

A weak economy coupled with IMF programs have likely contributed to lower wages and a lower standard of living in Zambia. The lower Zambian living standards were based on two structural adjustment policies: the currency devaluation and the wage cuts. In the first instance, the worsening economy was accompanied by higher inflation, which eroded the purchasing power of the workers (Hansen 2000, 89). The higher inflation is directly linked to the IMF policy of currency devaluation, which was intended to raise exports and thereby improve Zambia’s economy. The IMF had originally blamed the overvalued Zambian currency (kwacha) for the weaknesses of the export sector, because exports were made artificially more expensive to foreigners, whereas imports were encouraged by the relatively lower prices (Makgetla 1986, 398).

Secondly, it was the IMF-policy of wage and salary reductions that has been responsible for the lower real standard of living among Zambians (Makgetla 1986, 399; Karmiloff 1990, 303). Wages plummeted by 40% between 1974 and 1983 (Makgetla 1986, 402). The IMF argued that reducing wages would be essential to spur the export economy, because if wages were lower, then companies would generate more profits and have more capital at their disposal. This additional capital can then be used to make investments into the production of export goods (399). In the process of implementing the structural adjustment program not only were wages reduced, but unemployment also increased, which reduced consumption expenditure (Wulf 1988, 587). Social, health and education expenditures were also reduced, affecting mostly working people (Simutanyi 2006, 8). Despite the resistance of the industrial working class that was staging over 200 strikes between 1985 and 1993 against the program (6), the IMF policies with the exception of a brief time period between 1987 and 1989 were dutifully implemented (Karmiloff 1990, 305-306). It was the working-class that bore almost all the costs for these IMF reforms (Hawkins 1991, 845-846).

The IMF structural adjustment program has made no significant contribution to spur the Zambian export economy. This statement works counter to the IMF intention to raise export rates. The devaluation of the Zambian currency had slightly increased the number of export articles into the neighboring countries, including oxides, varnishes, lacquers, paints, chemical preparations, paper roll, raw cotton, fabrics, asbestos-cement pipes, dry batteries and clothing. However, the inadequate quality controls, unreliable surface transportation5 made the exports more complicated. Whereas the number of exports increased, the dollar value of total exports decreased since the start of IMF liberalization, which largely offset the benefits of increased exports. In fact, the export of non-copper materials has not compensated for the collapse in copper export earnings (Karmiloff 1990, 304). The value of exported merchandise goods decreased from $950 million in 1982 to $700 million in 1986 (Wulf 1988, 588). Furthermore, since the foreign loan obligations pushed down the capital available for the import of crucial capital goods needed for producing output for exports and job creation, the export economy was further weakened (Wulf 1988, 589). Overall, the weak export markets have contributed to the poor performance of the Zambian economy (588).

IMF policies have contributed to more economic and social inequality within Zambia. Even before the IMF intervention Zambia had been a very unequal country, devoting a significant share of its national income toward luxury consumption (Makgetla 1986, 401). The share of the national income going to the top 5% of the Zambian population increased from 35% in 1975 to 50% in 1983 (402). The IMF through its stabilization program effectively encouraged policies of privatization, wage cuts and reduced state intervention. While these policies had the intent to improve the Zambian economy, it exacerbated income inequality (402), because a high share of the national income continued to be used for the purchase of luxury commodities, whereas a reduction in wages and cuts in government subsidies for the vast majority of the poor and the workers meant that fewer resources would go to purchase basic commodities (401). The impact of economic inequality on the economy was that the falling real wages of the Zambians (based on the wage cut and devaluation policy) reduced the total rate of consumption, which tends to weaken the economy. The low level of consumption combined with reduced export earnings contribute to a weak performance of the Zambian economy. The subjection of Zambia to harsh neoliberal policies6 closely linked with the IMF policies have raised poverty and inequality (Simutanyi 2006, 9).

The economic performance of Zambia has not been strong during the IMF intervention years. Whereas the GDP had increased by 8% between 1980 and 1988, the population grew by 32% from 5.68 million to 7.53 million people in the same time period, explaining a fall in per capita GDP (Karmiloff 1990, 305). While the population increased, formal sector employment decreased from roughly 379,000 in 1980 to 360,000 in 1988 (305). The real per capita income in Zambia declined by 40% between 1974 and 1986 (Wulf 1988, 588). The pressure on the Zambian economy was increased by the fall in foreign donations that declined from an average of $569 million between 1980 and 1982 to $315 million between 1984 and 1985. The IMF has emphasized a path of budget consolidation for the Zambian government, meaning that it was obliged to keep the budget deficits low to guarantee loan repayments. While the budget deficit shrunk from 18% of GDP in 1980 to 8.5% in 1984, it increased again to 30% of GDP in 1986, yielding in higher inflation. The worsening budget conditions occurred in spite of enormous budget cuts (589).

Further research into the Zambian economy requires a more detailed analysis of the social-structural and economic factors influencing the economy of Zambia in historic terms. For example, the role of Zambia as a British colony prior to its independence in 1964 has shaped the Zambian economy by making it reliant on copper exports, which partly explains the economic volatility. How precisely does the past impinge on Zambia? The precise impact of IMF structural adjustment policies on the Zambian economy need to be assessed for its effectiveness, namely which programs have fulfilled their objectives and which ones have not. Finally, the case study of 1970s and 1980s Zambia can be used to make a comparison between the contemporary economic situation in Zambia and the rest of sub-Saharan Africa, yielding in policy discussions that can perhaps improve the fate of the Zambian economy.

References

Hansen, Karen Tranberg. 2000. Salaula: The World of Secondhand Clothing and Zambia. Chicago: University of Chicago Press.
Karmiloff, Igor. 1990. “Zambia”. In Manufacturing Africa: Performance and Prospects of Seven Countries in Sub-Saharan Africa, edited by Roger Riddell, 297-336. London: James Currey.
Makgetla, Neva Seidman. 1986. “Theoretical and Practical Implications of IMF Conditionality in Zambia,” Journal in Modern African Studies 24(3): 395-422.
Hawkins, Jeffrey J. 1991. “Understanding the Failure of IMF Reform.” World Development 19 (7):839-849. Accessed November 11, 2012 http://www.sciencedirect.com/science/article/pii/0305750X91901377
Simutanyi, Neo. 2006. “Neo-Liberalism and the Relevance of Marxism to Africa: The Case of Zambia.” Paper presented at the 3rd International Conference on ‘The Works of Karl Marx and the Challenges of the 21st Century’, Havana, Cuba, 3-6 May. Accessed November 11, 2012. http://www.nodo50.org/cubasigloXXI/congreso06/conf3_simutanyi.pdf
World Bank. 1994. Zambia Poverty Assessment. Vol. 1. Main Report (no. 12985-ZA). Human Resources Division, Southern Africa Development, Africa Regional Office.
Wulf, Jürgen. 1988. “Zambia under the IMF Regime.” African Affairs 87(349):579-594.

Endnotes
1 Liberalization policies involve policies by the government to reduce restrictions on the free movement of capital through the unification of the exchange rate, and the abolition or reduction of tariffs, taxes, subsidies, quotas, licensing rules. (Simmons and Elkins 2004, 172; Globalization 101 2012). The goal is to promote free trade. Simmons, Beth A., and Zachary Elkins. 2004. “The Globalization of Liberalization: Policy Diffusion in the International Political Economy.” American Political Science Review 98(1):171-189; Globalization 101. 2012. “Liberalization of International Trade.” Center for Strategic and International Studies, Levin Institute, State University of New York. Accessed November 27, 2012. http://www.globalization101.org/liberalization-of-international-trade/
For further discussion on the impacts of liberalization policies on countries consult Tussie and Aggio. 2003. “Economic and Social Impacts of Trade Liberalisation.” IMF Working Paper, Policy Development and Review and Africa Department, Washington DC, International Monetary Fund; Woodrow Wilson International Center for Scholars. 2005. “The Impact of Trade Liberalization on Poverty.” Conference Summary, Washington D.C., April 15. Accessed November 28,, 2012. http://www.wilsoncenter.org/sites/default/files/ImpactofTrade_low.pdf;

2 The exact history of IMF structural adjustment programs with the intention to liberalize the Zambian economy as a condition for the loans that are handed out to the country can be read in Simutanyi, Neo. 1996. “The Politics of Structural Adjustment in Zambia.” Third World Quarterly 17(4):825-839; Saasa, Oliver S. 1996. “Policy Reforms and Structural Adjustment in Zambia.” Office of Sustainable Development Bureau for Africa. Technical Paper No. 35. October. Accessed November 27, 2012. http://www.eldis.org/vfile/upload/1/document/0708/doc4533.pdf ;Geisler, Gisela. 1992. “Who is Losing Out? Structural Adjustment, Gender, and the Agricultural Sector in Zambia.” Journal of Modern African Studies 30(1):113-139.

3 The term “IMF stabilization program” will be used interchangeably with the terms “(IMF) structural adjustment program”, “IMF reform”, “IMF program”, “IMF liberalization” and “IMF policies”. They all refer to the sets of economic policy prescriptions of the IMF that were implemented by the Zambian government between the 1970s and and 1980s.

4 A parastatal company, or state corporation, is a company that is established by the Zambian government, but operates legally independently from direct government control, though it received huge subsidies until the IMF policies sharply reduced state support. Government officials occasionally also meddle with the parastatal company. The precise workings of the Zambian parastatal company can be read in Turok, Ben. 1981. “Control in the Parastatal Sector in Zambia.” Journal of Modern African Studies. 19(3):421-445.

5 Pilferage, traffic congestion and delays were common.

6 One definition of neoliberalism involves the desire to expand the sphere of markets through an increase in the number, frequency, formalization and repeatability of market transactions (Treanor 2005). Another definition states that neoliberalism is a theory of political economic practices that advances individual entrepreneurial freedoms within a framework of property rights, free markets and free trade (Harvey 2005, 2). It is often associated with the actions of the IMF and the World Bank, that both promote neoliberal programs. Cited in: Treanor, Paul. 2005 “Neoliberalism: Origins, Theory and Definition.” December 2. Accessed November 27, 2012. http://web.inter.nl.net/users/Paul.Treanor/neoliberalism.html; Harvey, David. 2005. A Brief History of Neoliberalism. New York: Oxford University Press.

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2 Responses to Zambia and the IMF

  1. Pingback: Social Democracy vs. Democratic Socialism by Larry Liu | PROGRESSIVE ACTIVISTS VOICE

  2. tgpollen says:

    Thanks for this.

    IMF’s engagement with the Zambian economy actually started in the late 1970s, but intensified, with more stringent conditions in the early 1980s.

    There are a few things you take for granted in the literature you consult; such as the explanations they offer for Zambia’s economic decline, especially those that privilege economic mismanagement. I find this narrative unsatisfactorily one-dimensional, as it fails to take into account the social-political and economic fabric of the Zambian society, including external influences acting upon the nation. Also, insufficient attention is drawn from the colonial legacy: Zambia’s problems started long before its independence as a Republic. The inheritance of a distorted economy, and the plight and challenges of the Zambian state to overcome this hurdle cannot be reduced to a poorly managed economy.

    Today, 20 November 2015, against the backdrop of mounting debt, a fall in copper prices, rapidly depreciating currency (worst performing in the world this year) [inflating debt repayment costs], reduced copper production, and now, electricity deficits, with people and businesses enduring long hours without power, rising inflation, the Government of the Republic of Zambia (GRZ) is being pressured to seek IMF funds and wisdom.

    As part of my PhD, I am spending long hours getting intimately connected with Zambia’s post-independence economic history. Given Zambia’s experience with the IMF, I find no good reason to solicit IMF support. IMF policies implemented post-1991 liberalisation continue to afflict the Zambian economy, including the current crisis.

    My initial thoughts on this are here: https://goo.gl/2LwliQ

    The article was meant to be part 2 of why Zambia shouldn’t seek IMF assistance: part 1 focusing on its own experience with the institution, the institution’s experience elsewhere, changing ideology within the institution, and why Zambia should not be its lab-rat. I just had ideas flowing and wanted to post something to update my blog as I hadn’t for a while, and also because I have a deadline right ahead, and wanted to get it out of the way. Maybe wrong prioritisation on my part; I should sort out my school things first before doing stuff like that. Anyway, the article argues less on the problems with IMF wisdom, both with reference to its flimsy theoretical underpinning and practicality viewed from Zambia’s own experience, but points out alternative courses of action.

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