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Foreign Direct Investment in Zambia

So much has been said about foreign investment in Zambia and elsewhere, particularly in the last decade. No doubt FDI — by which we mean investment of multinational or transnational companies — has played a significant role in the economic development of countries.

However, I would like to state that much of the talk about FDI, particularly in as far as factors attracting it to Zambia, has been more or less ”perfunctory.” I put forward here the thesis that there are factors other than economic policies that need to be given greater attention if Zambia is to be an attractive FDI destination.

Era of FDI

The period beginning in the 1980s and up to the present time could be referred to as the era of Foreign Direct Investment. One commentator once said that economic policy pursuits could be paralleled to fads. They come and go. Today you may be talking about FDI and the need to open up your economies. Tomorrow could see a shift to some other approach. But the tragedy of all this is that Africa, though most afflicted by economic problems, has yet to come up with something of its own.

In Zambia the advent of enhanced FDI focus in economic development is strongly linked to the dawn of democratic transition which was characterised by a shift from the era of one party state to multiparty state. The democratisation agenda also came generally with the neo-liberal economic dispensation

I put forward here the thesis that there are factors other than economic policies that need to be given greater attention if Zambia is to be an attractive FDI destination.

that has become the path for economic policy. This path for economic policy has not only been adopted by Zambia but also a majority of developing and advanced countries. The neo-liberal economic paradigm has been reinforced by the World Bank and the International Monetary Fund (IMF). It encourages opening up of national markets — removal of trade barriers to allow for free movement of capital, goods, services, creation of appropriate environment, so-called enabling environment, etc.

Why FDI?

A lot of factors have encouraged FDI focus as an agenda item in economic policy. For example, according to the IMF in the period 1980 to 1996, global FDI outflows increased at an average rate of about 13 per cent a year compared with average rates of 7 per cent both for world exports of goods and services and for world Gross Domestic Product (GDP). In addition, there has been the notion that where FDI occurs, you would expect a country to have positive externalities or spillover effects arising out of the investments from multinational companies.

For example, these positive externalities would include the benefits of Research and Development, R&D. FDI is also considered as a way of dealing with adverse terms of trade. A country with higher levels of FDI will most likely be exporting finished products — there would be value added to export goods. It is also considered to be a source of long-term external financing compared to loans from international banks.

Factors that attract FDI

There have been many studies carried out to establish what factors would make a particular country an attractive FDI destination. Here I am only going to highlight some. Most of the works done so far have indicated that to attract FDI there are certain policies that a country must pay attention to before experiencing an inflow of FDI. These include trade liberalisation — free movement of goods and services, tax policy, privatisation, social amenities, stability in all spheres — social, political and economic.

There are also such factors as market size, resources available — both human and natural resource endowments, etc. In the case of human resources, we are talking about skilled human resource predicated on sound education that is accessible to the people.

Global Situation

The state of the distribution of FDI is such that it is primarily taking place in developed countries or high-income countries. For example, the World Bank reports that in 1999, the value of FDI quoted in US Million Dollars in high-income countries was about 727,130 compared to low-income countries with only 9,750.

It should be mentioned also that distribution of FDI is disproportionate among low-income countries, with Africa having the least share of FDI. It is also the case that even within Africa, the distribution of FDI is uneven, for example, it ranges in value from (US$ Millions, 1999 figures) 1,376 in South Africa to 40 in Cameroon. This situation raises the question ”Why should there be so much emphasis on FDI as a way of fostering development, particularly on the part of those countries that have the least share of FDI?’

There is also a further question relating to this situation. Is it that low income countries have not put in place policies such as mentioned above that attract FDI inflows? Or could there be other reasons that might help us find an explanation to this situation? To answer fully the above question requires in-depth studies. However, let me try to provide some insights by looking at Zambia’s experience.

Experience of Zambia

Since 1991 the government of Zambia has been pursuing liberal economic policies. Important to this policy framework has been embarking on a very rigid, rapid and far-reaching structural adjustment programme. This strategy (supported by IMF and World Bank) was a dramatic shift from the previous government controlled approach to economic management.

At the heart of the new order of economic management has been, inter alia, trade liberalisation, removal of foreign exchange controls, public service reform, introduction of cost sharing (arrangement where both government and citizens share the responsibilities of meeting the costs) with respect to the social sectors — education and health, the heralded privatisation programme — government withdrawal in running business. Privatisation has tended to stand out as the major driving force for economic development.

The private sector-driven economic approach went with the emphasis on calling foreign investors

Why should there be so much emphasis on FDI as a way of fostering development, particularly on the part of those countries that have the least share of FDI?

to come and invest in Zambia. But I must mention here that not so much emphasis and enthusiasm has been given to Zambians to invest or indeed take over some of the para-statal companies that were being privatised. If there has been some Zambian investment such as Management Buy Out (MBO), this took place only in those companies that were lukewarm in performance and vibrancy. In a situation where there are low levels or no savings, it would be unlikely that there can be capital formation for people to invest in or buy companies that were highly vibrant.

Specific Incentives

One undeniable fact is that Zambia has not only structurally adjusted its economy as shown above over the past decade but has also tried to make itself an attractive destination for FDI by improving the standards of treatment given to foreign firms. Key to this has been the Zambian Investment Centre which has been trying to make itself a ”one stop shop.”

Other efforts linked to the Investment Centre have involved for example, investment guarantees under which the Investment Act assures investors that property rights shall be respected and that no investment of any description can be expropriated unless Parliament has passed an Act relating to the compulsory acquisition of that property. Moreover in case of expropriation, full compensation shall be made on the market value and must be convertible at the current exchange rate.

Investors are guaranteed that investments will not be adversely affected by any changes in the investment Act for a period of seven years. The country has gone further by being a signatory to the Multi-lateral Investment Guarantee Agency (MIGA) and other international agreements which guarantees foreign investment protection in cases of civil strife, disasters, as well as other disturbances.

At the bilateral level, Zambia has signed reciprocal promotional and protection of investment protocols with a number of countries.

In addition to the above incentives, Zambia could be considered an attractive destination to FDI because of its social and political stability. Since independence, the country has never experienced any civil strive.

Zambia’s Record

Have these incentives made a difference in attracting FDI to Zambia? To be honest, it has been difficult to discover exactly what the levels of FDI inflows have been to Zambia, especially with the view to looking at trends over a certain period of time. At the time of gathering information for my research, only investment pledges were available. Of course we do not know whether these promises to invest may translate into actual investments or not. This is an area that needs further detailed research.

However, the World Bank reports that in 1999, the value of FDI in Zambia was 163 Million US Dollars, compared to Mozambique’s 384 Million US Dollars and Tanzania’s 183 Million US Dollars. This of course does not give us a comprehensive picture of the situation over the past years. But we can say that Mozambique and Tanzania are relatively ahead in attracting FDI as compared to Zambia.

Why has Zambia despite all the efforts — at structural adjustment and additional foreign investor incentives — not been much of an FDI destination?

However, even in the absence of statistical evidence of the amount of FDI inflows to Zambia, we can still — going by the current situation — conclude that much has not happened in the country with respect to FDI.

May be the question to address is why Zambia — despite all the efforts in terms of structural adjustment and additional foreign investor incentives — has not in fact been much of an FDI destination?

Of course this is not to say we have not attracted any foreign investors. There certainly has been such as in the mining sector. But these outside investors are not in fact coming to establish new firms altogether. Most of them took over already existing firms and especially those that were vibrant.

Why this situation?

Let me now offer some reasons as to why Zambia has not been so much of an FDI destination. In the first place, it is important to acknowledge — as has been established already — that the most active destination for foreign investment still is the rich countries.

Zambia’s being a landlocked country makes it inevitably a high cost area. The difference we have observed earlier between Zambia on one hand and Tanzania and Mozambique on the other could be due to this reason. Mozambique and Tanzania have direct access to sea transportation.

The other reason that one may be looking at, especially when comparing beyond Africa, is education and thus availability of skilled personnel. It is hopeless for one to expect an inflow of foreign investment, particularly that which is long-term in orientation, with what is obtaining currently in the education sector.

We have also been caught-up in the ”poverty trap.” Reports of 80 per cent of the people living below the poverty line cannot in any way add value to investment attraction. This could be looked at as perhaps one of the major reasons for Zambia not being so much of an FDI destination. Just a matter of highlighting this point: I remember a representative of a foreign firm that was intending to come to invest in Zambia asking me about trends in the cost of the JCTR monthly Food Basket. This measures the cost of living in Lusaka and how that relates to household’s incomes. It is a simple and shocking indication of poverty levels. We see here an inquiry pertaining to people’s ability to buy goods and services.

Linked to poverty has been the dreaded HIV/AIDS pandemic that has continued to ravage countries in Sub-Sahara Africa. This pandemic continues to claim lives whose productive contribution is essential to any foreign firms investing in Zambia.

Another point to add to this discourse is that it is paradoxical that while on one hand we are trying to attract foreign investment, we have on the other hand allowed companies to collapse. The recent relocation of the Lever Brothers bath-soap plant (to a neighbouring country ) is one case in a line of companies finding difficulties to operate effectively and eventually winding-up operations.

A final invariable factor that discourages FDI in Zambia is the perception of high levels of corruption. The just released Transparency International 2001 Report places Zambia at 76 out of 90 countries on its scale of its scale of “Corruption Perception Index.” Only 14 places from bottom.

What should Zambia do?

Unless the issues highlighted above are dealt with, there is very little hope in significantly attracting foreign investment. In my view, there is great promise in investing in education beyond what is currently happening. It is through education that a lot of problems can be tackled — poverty, HIV/AIDS, sustained availability of skilled human resource. We can and should do as much as we can at policy level and incentives to make Zambia an FDI destination. But without addressing fundamental issues like education, poverty, HIV/AIDS, corruption there will be little hope for FDI and the overall development of the country.

This is why I strongly feel that the Zambia Investment Centre should be working closely with institutions such as Ministry of Education, Anti Corruption Commission, Central Statistical Office. In that way, when marketing Zambia, whatever is happening on the ground in terms of improvement could be highlighted.

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