GIDEON ROBERT UNIVERSITY

AN ASSESSMENT OF THE EFFECT OF ECONOMIC LIBERALISATION ON LABOUR IN ZAMBIA: A CASE STUDY ON WAGES AND THE ALLOCATION OF LABOUR IN THE CITY OF LUSAKA

BY GIDEON C MWANZA

A Dissertation Submitted in Partial Fulfilment for the Award of the Bachelor of Arts Degree in Human Resource Management (BHRM)

1.0 Introduction

Studying the implications of trade liberalizations on wages and employment has always been an important topic in the open economy macroeconomics literature; and special attention has been devoted to understanding its effects on development and human resource planning at macro level (Ostry and Rose, 1992; Papageorgiou et al. 1990). The recent experiences of several countries that have under-Most of the economic literature considers that trade liberalization leads to an increase in welfare derived from an improved allocation of domestic resources. There are improvements for instance in wages and employment opportunities. Trade liberalization encourages investments and job creation. This, in turn, will generate growth in the short to medium term as the country adjusts to a new allocation of resources more in keeping with its comparative advantage (McCulloch et al., 2001). Research has show that this process is neither smooth nor automatic and may take some time (Matusz and Tarr, 1999).

The role of trade policy in economic development has been a key debate in the development literature for most of the second half of the twentieth century. The evolution of thinking on trade orientation and growth has been charted by (Krueger, 1997). Krueger emphasises the accumulation of evidence of a positive correlation between growth wages and employment on one hand and the operation of trade liberalisation with a more open trade orientation appearing to grow faster through time. Edwards (1993; 1998) has argued that the positive association between trade liberalisation and openness is robust to the measure of openness used, though Rodriquez and Rodrik (1999) challenge this conclusion, arguing that although there is little systematic evidence linking improvement in wages and employment creation and trade liberalisation, the evidence overstates the relationship between the two.

The main question the human resource practitioners and development practitioners is this: What happens to wages and the allocation of labour during a period when a comparatively closed developing economy becomes increasingly exposed to economic liberalisation through a period of trade reform’? Considerable interest in this question has emerged in recent years both for its policy implications and for its apparent ramifications for trade theories and labour accumulation (Robertson, 2000). The traditional Stolpcr— Saniuelson theorem leads to the expectation that trade liberalization would raise the price of developing countries’ abundant factor (unskilled labour), thus reducing the skilled wage premium and, by extension, wage inequality; this is the symmetric counterpart to the theory that trade expansion is a significant cause of rising inequality in industrialized countries (Wood, 1994). In a number of developing countries, however, no such drop in inequality has been detected and in Zambia, it is unknown; an contraire, some have even shown a rise in the skilled wage premium, for example Mexico (Hanson and Harrison, 1999; Robertson, 2000), Chile (Beyer et al., 1999), Morocco (Currie and Harrison, 1997), Costa Rica (Robbins and Gindling, 1999), and Colombia (Robbins, 1996a).

In this thesis the researcher contributes toward an improved empirical understanding of the aggregate labour impact of trade liberalization by describing the experiences of employers and petit bourgeois (managers). In previous work on Brazil for instance, it has been shown that trade liberalization had a small short—term downward impact on aggregate employment and especially on manufacturing sector employment (Moreira and Najberg, 2000). But, previous work has examined neither changes in the economy-wide dispersion of wages nor changes in the more detailed allocation of labour through the trade liberalization period. Brazil’s case is well suited as an exemplar of the labour market adjustment associated with trade

liberalization. Although Brazil’s economy ranks eighth globally, it remains thoroughly rooted in the developing world.

The global economic depression of the 1970s saw Zambia gaining less from copper exports and traditional cash crops like cotton, tobacco and maize. Coupled with weak economic policies, the soaring of oil prices, she could not manage her economy with frugality because of pressure from the World Bank and the International Monetary Fund (Kalenge 2003, World Bank 1993; 2003). Economic liberalization in Zambia was extensively developed by the MMD government just after assuming power in 1992. The years that followed saw the implementation of neo liberal measures and these included privatisation, trade liberalisation, the creation of a stock market and a Privatisation Agency (Ngandwe 2001; Litula, 2002). The dawn of privatization was preceded by an era of rapid economic decline in Zambia. Following the liberalization programme, a number of parastatals were either closed or sold to new investors. Some people were laid off as a result. The extent to which the liberalization programme has affected the labour market is not known.

1.1 Statement of the Problem

Publishable research in Zambia looking at economic liberalisation and especially trade and labour is limiting. It is now more than two decades since the MMD put in place economic revival policies and were still in no position to succinctly state that on account of diversification of trade in the economy (i) employment has been created (ii) There are more jobs in the private sector than the public sector (iii) there are job cross overs between the sectors, wages have improved. Therefore it is necessary to investigate whether economic liberalization really contributed to the phenomenon of unemployment and poverty.

1.2 Research Questions

1. From 1992 the time liberalization was invoked to date, what has been the employment profile and wage structure like?

2. To what extent have the induced structural changes of liberalization created employment:

a) Gender-wise?
b) Sector-wise?
c) By movements of labor across sectors?

1.3 Research Assumptions

The researcher assumes that since the economic policy debate on the issue of creating employment and wealth through wages in many developing countries has been dominated by the structural adjustment programs, where two main policy tools regarding employment growth have been labor market flexibility and openness to the world economy, it is assumed that labor demand by the investor is primarily determined by the cost of labor and labor market regulations that create flexibilities and artificially high low labor costs. On the other hand, trade liberalization, based on the Heckscher-Ohlin theorem, is expected to increase employment in developing countries with a comparative advantage in labor-intensive sectors. Labor market flexibility is also supposed to play an important role in connection with the effects of openness. It is argued that the positive effects of trade liberalization on employment and real wages may be hindered by labor market distortions, such as trade unions or minimum wage legislation, which prevent the initial downward adjustment of real wages in the short-term due to the slow pace of the reallocation of capital across sectors (Edwards 1988; Cox-Edwards and Edwards 1994).

1.4 Research Aim and Objectives

The aim of this study is to show that liberalization has not created significant employment and wages in Zambia. Specifically, the study was set to:

  1. To explore the employment profile and wage structure from 1992 to date.
  2. To profile by trending the wage structure and employment profile from 1992 to date.
  3. To determine the extent to which trade liberalization has created employment and real wages across gender, sectors, and movements of labor across the two sectors (public and private).
  4. To provide a framework for human resource development based on the study outcomes.

1.5 Scope of the Research

This is a study limited to Lusaka comparing two investment sectors which are the manufacturing and agriculture sectors. The study is grounded in human resources focusing on employment creation and creation of wealth at the micro-level. A mixed study approach is used to generate the data in this study.

1.6 Justification of the Study

This study is justified for many reasons but the following are very profound:

1. Zambia is particularly well suited for studying the effects of trade liberalization. First, Zambia moved from being a very protected economy to an open one in a relatively short period of time. Second, there is a minimum wages Act and the existence in the economy a trade union movement that watches over earnings inequality.

Zambia has been a pioneer in radical development south of the Sahara and is expected to have very high-quality data but relatively unexplored investment establishment and employment data sets to argue for and against trade liberalization. The research data that will be generated and the research design could be extended to conduct a nationwide study later on.

2.0 Introduction

This chapter will review the literature related to trade and. Since research on the topic is yet to gain momentum in this part of the world; most of the literature presented is informed by researches conducted in the West and a few in Africa and elsewhere.

2.2 Existing Evidence

In this section, literature is reviewed under the heading existing evidence and the headings include: Looking at the previous regime and economic deficits, the process of trade liberalization giving an example of eight countries, the social and economic impact of trade and liberalization, and theoretical context.

2.2.1 Previous Regime and Economic Deficits

At independence in 1964, Zambia’s economy grew the British South Africa Company (BSAC, originally set up by the British imperialist Cecil Rhodes) retained commercial assets and mineral rights that it acquired from a concession signed with the Litunga of Barotseland in 1892 (the Lochner Concession). Only by threatening to expropriate the BSAC, on the eve of independence, did the incoming Zambian government manage to get the BSAC to relinquish the mineral rights. The Federation’s government-assigned roles to each of the three territories: Southern Rhodesia was assigned the responsibility of providing managerial and administrative skills; Northern Rhodesia provided copper revenues; and Nyasaland provided the Black labor (Bonnick, 1997; Joseph, 1998; Juang, 2008) After independence, Zambia followed in the steps of the Soviet Union by instituting a program of national development plans, under the direction of a National Commission for Development Planning: the Transitional Development Plan (1964– 66) was followed by the First National Development Plan (1966–71). These two plans, which provided for major investment in infrastructure and manufacturing, were largely implemented and were generally successful. This was not true for subsequent plans. However these plans attempted to create wealth for the citizenry through employment creation. Most of the citizens were employed in large parastatal companies and the Public service. The parastatal companies were a birth of the Mulungushi Economic reforms of 1968. It should be noted that , a major switch in the structure of Zambia’s economy came with the Mulungushi Reforms of April 1968: the government declared its intention to acquire equity holdings (usually 51% or more) in a number of key foreign-owned firms, to be controlled by a parastatal conglomerate named the Industrial Development Corporation (INDECO). By January 1970, Zambia had acquired majority holding in the Zambian operations of the two major foreign mining corporations, the Anglo American Corporation and the Rhodesia Selection Trust (RST); the two became the Nchanga Consolidated Copper Mines (NCCM) and Roan Consolidated Mines (RCM), respectively. The Zambian government then created a new parastatal body, the Mining Development Corporation (MINDECO). The Finance and Development Corporation (FINDECO) allowed the Zambian government to gain control of insurance companies and building societies. However, foreign-owned banks (such as Barclays, Standard Chartered and Grindlays) successfully resisted takeover. In 1971, INDECO, MINDECO, and FINDECO were brought together under an omnibus parastatal, the Zambia Industrial and Mining Corporation (ZIMCO), to create one of the largest companies in sub-Saharan Africa, with the country’s president, Kenneth Kaunda as Chairman of the Board. The management contracts under which day-to-day operations of the mines had been carried out by Anglo American and RST were ended in 1973. In 1982 NCCM and RCM were merged into the giant Zambia Consolidated Copper Mines Ltd (ZCCM) (Bonnick, 1997; Joseph, 1998; Juang, 2008).

Unfortunately for Kaunda and Zambia, the programs of nationalization were ill- timed. Events that were beyond their control soon wrecked the country’s well-laid plans for economic and national development. In 1973 a massive increase in the price of oil was followed by a slump in copper prices in 1975, resulting in a diminution of export earnings. In 1973 the price of copper accounted for 95% of all export earnings; this halved in value on the world market in 1975. By 1976 Zambia had a balance-of-payments crisis, and rapidly became massively indebted to the International Monetary Fund (IMF). The Third National Development Plan (1978–83) had to be abandoned as crisis management replaced long-term planning (MMD, 1991; Bonnick, 1997; Juang, 2008).

By the mid-1980s Zambia was one of the most indebted nations in the world, relative to its gross domestic product (GDP). The IMF was insisting that the Zambian government should introduce programs aimed at stabilizing the economy and restructuring it to reduce dependence on copper. The proposed measures included: the ending of price controls; devaluation of the kwacha (Zambia’s currency); cut- backs in government expenditure; cancellation of subsidies on food and fertilizer; and increased prices for farm produce. Kaunda’s removal of food subsidies caused massive increases in the prices of basic foodstuffs; the country’s urbanized population rioted in protest. In desperation, Kaunda broke with the IMF in May 1987 and introduced a New Economic Recovery Programme in 1988 modelled after the Soviet Union. However, this did not help him and he eventually moved toward a new understanding with the IMF in 1989. Most observers argue that these economic reforms constituted a threat to the privileges of the large urban community that provided the main support for UNIP (Bates and Collier 1993; Callaghy 1990, 1993; Hawkins 1991; West 1992).

In 1990, with the collapse of communism in the Soviet Union and Eastern Europe (on which Kaunda’s philosophy of Zambian Humanism had been fashioned), Kaunda was forced to make a major policy volte-face: he announced the intention to partially privatize the parastatals. Time, however, was running out for him. As Mikhail Gorbachev announced perestroika and glasnost, small-time dictators who

had copied Joseph Stalin’s policies had no choice but to realise that their days were numbered. In Zambia then, poverty became the order of the day. Unemployment soared and real wages dimished and the purchasing power was reduced on account of cost inflation. Public disquiet arose. The UNIP government had a long tradition of subsidizing urban consumer commodities and was vulnerable to urban protest. Faced with “food riots” in the urban areas each time comprehensive reforms were attempted, President Kaunda abandoned the economic reform programs. But an escalating debt burden together with increasing donor coordination meant that by the late 1980s, Zambia was ineligible for financial assistance from the international financial institutions (IFIs). In 1989 the Kaunda government again approached the IFIs for a structural adjustment agreement (Callaghy1993; West 1992). Kaunda called multiparty elections in 1991, and lost them to the Movement for Multiparty Democracy (MMD). Kaunda left office with the inauguration of MMD leader Frederick Chiluba as president on 2 November 1991. Chiluba’s legacy created a to……………..tal dependency on donors to drive employment creation and creation of wealth (wages) within the citizenry (MMD, 1991).

2.2.2 Chiluba’s Economic Reforms

The Frederick Chiluba government (1991–2001), which came to power after democratic multi-party elections in November 1991, was committed to extensive economic reform. The government privatised many state industries, and maintained positive real interest rates. Exchange controls were eliminated and free market principles endorsed. It remains to be seen whether the Mwanawasa government will follow a similar path of implementing economic reform and undertaking further privatization. Zambia has yet to address issues such as reducing the size of the public sector, which still represents 44% of total formal employment, and improving Zambia’s social sector delivery systems (MMD, 1991; Bonnick, 1997).

In the early 1990s, economic events were overtaken by political events as the continuous decline of the Zambian economy became the main rallying cry of forces

opposed to the one-party regime. In 1991, the Movement for Multiparty Democracy (MMD), an opposition drawn from a broad coalition of trade unions, business interests, intellectuals, and students, won an overwhelming electoral victory over the UNIP, which had been in power for 17 years. Zambia thus became one of the first countries in Sub-Saharan Africa to experience a peaceful transition to multiparty rule. One of the most significant aspects of the transition was the fact that the MMD had promised to implement an ambitious economic reform program (MMD 1991). The peaceful transition to multiparty democracy, as well as the economic policies that were promoted by the new government of President Frederick Chiluba, made Zambia a model for Africa in the eyes of both the international donor community and much of the academic community (Bratton 1992; Joseph 1992; 1998; Bonnick 1997). With donors eager to promote one of the few African “success stories” of dual reforms, Zambia experienced substantial growth in official development assistance including expertise to develop her liberalization policies in the 1990s.

A range of liberal reforms were implemented soon after the MMD government came to power in 1991, and evaluations of Zambia’s adjustment efforts after 1991 have emphasized the pace of economic liberalization as one of the government’s most remarkable achievements (van de Walle and Chiwele 1994; Seshamani 1996; World Bank 1996a, 1996b). These policies were aimed at removing distortions. In Zambia just like other modern LDCs, there are various distortions observed in the domestic economy: intrinsic distortions that are regarded as market failures and artificial distortions caused by government interventions. The governments of many LDCs have frequently distorted the prices of labor and capital faced by modern-sector firms in ways that make capital cheap relative to labor (e.g., Gillis et al., 1987). The wage rates in the city are often regulated by placing a ceiling called the Minimum Wage.

2.2.3 Evidence of Trade Liberalization in The Eight Countries

In order to give preliminary background of gains and losses I the domain of trade and liberalisation, noting that data about Zambia is lacking, the researcher gives the process of liberalisation in eight countries. The evidence presented in the eight country case studies shows that over the past 23 years, but particularly during the 1990s, some LDCs implemented gradual liberalization of their trade regimes. This was pursued at multilateral, regional and bilateral levels. Their trade policy changes stemmed from the commitments negotiated multilaterally through the Uruguay Round of trade negotiations. But there were also major elements of broader economic policy strategies such as structural adjustment programmes (SAPs). The annex provides a summary table mapping out the trajectories pursued by these countries (Banister and Thugge (2001). After decades of highly interventionist trade regimes, all eight countries initiated tariff reforms, which resulted in gradual but considerable reductions of the MFN average tariff rate and its dispersion.

A number of quantitative restrictions (QRs) on imports were eliminated or converted into their corresponding tariff equivalents. Trade liberalization was also manifested in the removal of items from restricted imports lists and the simplification of export– import activity through, for example, the elimination of export-import licences. In other words, the trade reforms made international trade more accessible and simpler in all countries (Matusz and Tarr, 1999). Alongside trade liberalization, all countries have signed some type of trade agreements with neighbours and/or other trade partners (Table 2.2.3.1). They are all signatories to at least one free trade agreement (FTA) through which they grant and receive preferential market access. The two African countries in the group, Malawi and Zambia, have preferential access to major developed countries: with the EU through the EBA initiative and the Cotonou Agreement, and with the United States through AGOA. Bulgaria has an FTA with the EU and Bangladesh also has preferential access to the EU for its garment exports. For the remaining countries, the main trade arrangements have been established with countries in the same region. While trade liberalization provided incentives to tradables, bilateral and regional trade agreements made trade more attractive with certain partners. As will be shown in the next section, these arrangements have had a considerable impact on recent trade flows, changing both the basket of goods traded and the trade partners.

August 6, 2021
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