Report No. 124032-ZM Republic Of Zambia

IntroductionCHAPTER 1: INTRODUCTION1.1 Outlining the Poverty and Inequality Challenge1.Zambia has successfully raised its average annual gross domestic product (GDP) growth ratesince the early 2000s. Between 2004 and 2014, it averaged 7.4 percent per year. This success was drivenby an improvement in the macroeconomic indicators (relative to the 1980s and 1990s), debt relief, heavyinvestment in the social sectors (by the government and cooperating partners), and a large increase inmining and agricultural production since 2004. This success raised average per capita incomes afterdecades of economic volatility since the country’s independence in 1964 (figure 1).2.Economic growth has been accompanied by much better development outcomes in health andeducation. For example, since 2007, many health indicators have progressed. Child malnutrition, infantand under-5 mortality, and the maternal mortality rate have decreased. Efforts have also been successfulin combating Human Immunodeficiency Virus Infection/Acquired Immune Deficiency Syndrome(HIV/AIDS), malaria, and other diseases. The Millennium Development Goals (MDGs) linked to theeducation sector were achieved (including universal primary education and eliminating gender disparityin primary education).Figure 1. GDP Per Capita (US ), 1964–2015Source: World Bank 2017d.Figure 2. Both Poverty and Inequality Are HighSource: Living Conditions Monitoring Survey (LCMS)2015 and PovCalnet.3.Zambia is experiencing a large demographic shift and is one of the youngest countries globallyby median age. The population is growing rapidly at 2.8 percent per year, resulting in the populationdoubling close to every 25 years. Zambia is expected to continue experiencing significant populationgrowth as the large youth population enters the reproductive age. This is because fertility rates havedeclined only slowly and remain at 5.3 children per woman (CSO 2014). High fertility is associated withhigh maternal mortality, health issues, and low female economic participation. Reducing fertility rateswould not only have a long-term impact on labor supply (supporting a better educated workforce in 15years), but also a more immediate impact on female economic participation.Zambia Systematic Country Diagnostic 3

Introduction4.High population growth increases the demand for jobs, health, and other social services, whichthe economy is not able to provide at present. Between 2015 and 2050, the working age population willmore than double, which means Zambia would need to create over 10 million new jobs by 2050 to keeplabor force participation and unemployment rates unchanged. This is equivalent to about 300,000 newjobs per year, just to stand still (World Bank 2017a). Nevertheless, as a predemographic dividend country,if Zambia capitalizes well on its transition from high to low birth and death rates, it could also spur itsgrowth prospects. However, it is critical to underscore that the demographic dividend for Zambia willneither be automatic nor guaranteed, but needs to be earned by creating sufficient good jobs (GRZ 2015).5.Rapid urbanization has been accompanied by a decrease in urban poverty incidence, but maskssluggish growth in small towns and cities. After a decade of de-urbanization in the 1990s, urbanizationhas been an important driver of change over the past 15 years. However, from 2000 to 2014, urban growthin Zambia has been significantly more focused on the capital city than the average for Sub-Saharan Africa.The annual population growth of Lusaka is over twice the average for Sub-Saharan Africa (1 percent). Incontrast, the share of secondary towns in Zambia is growing more slowly than in the rest of Africa (by only0.7 percent in Zambia compared with 1.8 percent elsewhere). These disparities may exacerbate uneventerritorial development, as small towns and cities play a crucial role in strengthening the links amongfirms; between firms and consumers; and within local, provincial, national, and international supplychains.6.Despite the increase in per capita economic growth, Zambia’s national poverty and inequalityhave remained stubbornly high. Zambia faces both high levels of poverty and inequality (figure 2), evenwhen compared to other countries in the region. Impressive economic growth in the decade to 2014brought benefits to urban areas, but poverty in rural areas remains widespread (the urban povertyincidence is less than half that of rural areas) (figure 3). The rapid population growth meant that thenumber of Zambians living in poverty increased between 2010 and 2015 (figure 4). The structure of growthbenefited the people in urban areas (both poor and non-poor), more than the poor in rural areas. Regionaldisparities have also not narrowed, and the sharing of prosperity in Zambia has deteriorated withinequality on the rise (see the analysis of poverty trends in chapter 2 for further details). Therefore, themost important questions for this Systematic Country Diagnostic (SCD) become: Why did the rapideconomic growth between 2004 and 2014 not lead to substantial poverty reduction and why did inequalityincrease?7.The current development model being pursued has imposed environmental and resourceliabilities. Agricultural growth has been based on increasing land use rather than improved productivity,leading to rapid deforestation. Mining activities have resulted in pollution, and Zambia also faces high andgrowing climate change impacts. Copper price volatility also continues to challenge macroeconomic andfiscal management (see chapter 7 for a discussion of sustainability issues). Debt levels have soared to riskylevels only 12 years after the Heavily Indebted Poor Country (HIPC) and the Multilateral Debt ReliefInitiative (MDRI) programs provided US 6.5 billion of debt relief from 2005.Zambia Systematic Country Diagnostic 4

IntroductionFigure 3. Incidence of PovertySource: LCMS 2010 and LCMS 2015.Figure 4. Number of People in Poverty (million)Source: LCMS 2015 and PovCalnet.1.2 Why Has Poverty Remained So High, Despite GDP Growth?8.GDP growth averaging 7.4 percent between 2004 and 2014 meant the economy more thandoubled in size. In per capita terms, with the population growing at 2.8 percent, the change is smaller butstill sizeable. This has led many to question why poverty rates remained stubbornly high. The answer islinked to the increasing inequality. The growth was thus exclusive (benefiting those well-off already) andnot inclusive (not reaching the poorest households).9.Three factors are argued by this diagnostic to have conditioned progress with poverty reductionand the wider development process in Zambia. First is extractives-based growth, characterized by a largecopper mining sector. Second is uneven territorial development, illustrated by a large rural-urban divideand very high spatial and sectoral inequalities between Lusaka and Copperbelt and the rest of the country.Third is stability but weak governance, characterized by periodic elections, but with a competitive andpersonalized settlement, along with weak institutions and limited accountability. This results in policiesand public resource allocations that often entrench rather than alleviate distortions to address povertyand promote diversification. Each of these defining characteristics has deep historical roots.1.2.1 Extractives-Based GrowthHypothesis 1: Copper mining has led to a volatile economy, while many of the benefits havenot been fully realized.10.Mining has always played an important role in Zambia’s economy. Copper has been mined forover 50 years. While there has been repeated discussion of diversification to reduce dependency oncopper, success in realizing such a goal has been limited. This results in part from some of the negativeexternalities of the sector and in part because Zambia has to date been unable to realize the full potentialbenefits from the mining sector. Maximizing these benefits would be an important step for creating thenecessary financing to develop other sectors (this point is discussed in greater detail in chapter 5).11.The large increase in copper prices and production since 2004 has had a significant impact onthe Zambian economy. Since the privatization of underperforming state-owned mining companies in theearly 2000s, private investment in the mines has exceeded US 12 billion. In response, copper and cobaltZambia Systematic Country Diagnostic 5

Introductionproduction increased from less than 250,000 tons per year in the early 2000s to more than 790,000 tonsin 2016, making Zambia the world’s ninth largest copper producer and increasing mineral royalties (figure5). While the Zambian government, through the Industrial Development Corporation (IDC) and ZambiaConsolidated Copper Mines Investment Holdings (ZCCM-IH), owns a small share in the operatingcompanies, there is no private large-scale Zambian mining operation. This has important effects on thepolitical profile of the industry and the degree of trust and cooperation between the government, themining companies, and the unions.12.Copper mining has in recent years provided 70 percent of exports and 12 percent of GDP. Inaddition, 80 percent of Zambia’s recent Foreign Direct Investment (FDI) has been to the mining sector(World Bank 2015a). While the mining sector has numerous links to other sectors, including services(Lipperty 2014), and despite its importance and size, the sector is still often described as an enclaveindustry. For example, it does not employ many people. It remains a capital-intensive sector, employingonly some 90,000 workers directly (about 8 percent of total formal employment in Zambia).Approximately US 2 billion worth of goods and services are procured by the industry annually, only 10percent of which are locally produced. Establishing better links and local content can to date beconsidered as forgone benefits from mining, with many policy failures having been identified as a rootcause of this issue.13.Until recently, the government received little fiscal revenue from mining, but it has grownrapidly since 2010 and reached 28 percent of total revenue in 2015 (figures 5 and 6). World Bank (2016b)highlights, using data from the Extractives Industries Transparency Initiative (EITI), that the mining sector(which includes quarrying and cement production) contributed ZMW 8.8 billion in 2014, equivalent to 28percent of total domestic revenue, up from ZMW 7.7 billion in 2013 and ZMW 7.6 billion in 2012.1 Despitethe increase in revenues, from much lower levels in the 2000s, concerns about transfer pricing or illicittransfers and lost revenues from the sector persist, although there is disagreement about their magnitude(Readhead 2016).Figure 5. Revenues from MiningFigure 6. Mining Revenues as a Percentage ofDomestic RevenueSource: EITI.14.The large amount of copper mining has left a legacy of environmental liabilities in mining towns.About 70 years of mining operations, no formal mine closures, and a lack of concurrent rehabilitation ofmining sites have resulted in a massive ‘environmental mortgage’. Zambia faces an inter- andA lack of quality data has been a huge barrier to

ND-GAIN University of Notre Dame Global Adaptation Initiative NDC Nationally Determined Contribution NES National Electrification Strategy NGO Nongovernmental Organization NPS National Payment Systems NRC National Registration Card OBB Output-based Budget OPHI Oxford Poverty and Human Development Initiative PAYE Pay-As-You-Earn