Doing Business in Africa: Zambia

Zambia, a landlocked country in southern Africa, is a country built on a single commodity – copper. Since independence in 1964 from the British Empire, the country’s economic and political fate has been tied to the price that copper, a crucial industrial metal, commands on world markets.

Politics, too, however has had its hand to play in determining Zambia’s fate. Indeed, Zambia was originally lumped together with neighboring Malawi and Zimbabwe – then called Rhodesia – in the Federation of Rhodesia and Nyasaland, an administrative unit of Britain’s empire is southern Africa that was created in 1953.

The federation proved unpopular, particularly in Northern Rhodesia – what would eventually become modern-day Zambia – and protests led by the United National Independence Party, headed by Zambia’s future first chief of state, Kenneth Kaunda, led to its dissolution in 1963 and independence as a separate nation in 1964.

Kuanda, while a Zambian patriot determined to lead his country out of colonial bondage, nonetheless proved less than an ideal ruler. Following the path set down by other African independence rulers, Kuanda’s presidency became autocratic and increasingly socialistic. In 1968 all parties except Kuanda’s UNIP were banned and in 1968 a program of nationalization of major foreign holdings in the country was instituted.

Ostensibly aimed at using Zambia’s rich copper resources to promote development, the nationalizations proved disastrously ill-timed. In the decade following, for instance, world oil prices skyrocketed in 1973 and 1979 as a result of war and revolution in the Middle East. This had the effect of choking off global industrial demand for copper – Zambia’s primary export – while dramatically increasing Zambia’s import bill for petroleum.

Coupled with large numbers of refugees from the late-Cold War conflicts throughout southern Africa and  caught between the hammer of reduced export revenues and increasingly expensive imported petroleum, the Zambian economy went into free fall.

By the 1980s, as a result, Zambia became one of the most indebted countries in Africa. Then, in 1990, the end of the Cold War and political unrest in Zambia over Kuanda’s continuing misrule forced the embattled president to enact political reforms that led to multiparty elections – and his own ouster – in 1991.

In his place, Zambians elected Frederick Chiluba as president – Zambia’s second since independence – and gave his political party, the Movement for Multiparty Democracy, a commanding lead in Zambia’s parliament.

Chiluba and his party pushed through a series of economic and political reforms that completely restructured the Zambian state and economy. Nationalized firms, particularly in the crucial mining sector, were privatized, state control over the economy was lessened, and foreign capital allowed in.

In support, foreign creditors and donors in the West provided economic aid and agreed to forgive some of Zambia’s outstanding debt.

Chiluba, then, refashioned Zambia along Western lines, and in the process promoted a much more benign environment for economic growth and entrepreneurship. Coupled with a strong rebound in demand for copper – particularly from China – by the late ‘90s and early 2000s, the stage was set for the new Zambia to produce significant amounts of economic growth.

Ease of Doing Business

Given all this, what are business conditions like in Zambia? According to the World Bank, Zambia currently ranks 76^th out of 183 countries on its Ease of Doing Business Index – a measure created by the bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses.

By way of comparison, the United States ranks 4^th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.

What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process in order to establish in-country averages.

When this metric is applied to Zambia, the bank finds that Zambia ranks 57^th out of 183 in ease of starting a business, making Zambia a relatively easy place to start a legal commercial enterprise. To start a business in Zambia, one has to complete six bureaucratic procedures that take a total of 18 days at a total cost of about $270, with no minimum amounts of capital required by the government on the start-up.

Figure 1:

How the World Bank Measures

the Ease of Starting a Business

         

Using similar metrics for other aspects of business operations, the bank has ranked Zambia in a number of other areas. To obtain a construction permit, for instance, Zambia is ranks 158^th out of 183 – much worse than its business creation ranking – as it takes the completion of 17 procedures, which takes on average 254 days at a cost of $23,000, or around 24 times national income.

Clearly, this is a very large obstacle to overcome for the average Zambian and constitutes a large obstacle to business expansion.

Continuing in its assessment, the World Bank has determined that in order to obtain and register property, Zambia ranks 83^rd out of, again, 183 countries measured. To register property in Zambia, the bank finds, it takes the completion of five bureaucratic procedures that takes, on average, 40 days and costs 6.6-percent of the property’s financial value in fees and other costs to complete.

Zambia does much better when it comes to obtaining credit, where it ranks 6^th out of 183 – making the country one of the best places in the world in this category. Here, as depicted in Figure 2, the bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges.

When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. In Zambia, creditors have very strong legal rights and private credit bureaus have a great deal of information on potential creditors in country.

Figure 2:

How the World Banks Conceptualizes Credit Acquisition

 

When it comes to protecting investors and minority shareholders, unfortunately Zambia does much worse. Here, the country ranks 74^th out of 183 countries – making the country a middling place for minority shareholders. Zambia received this score because the country is an easy place to bring minority lawsuits, holds company directors legally liable, and forces some degree of conflict-of-interest disclosures by corporate officials.

Zambia fortunately does much better in the area of taxation. The World Bank estimates that pleasing the tax man in Zambia requires a total of 37 payments over the course of a year which, in turn, takes up to 132 hours to complete and can consume up to 16.1-percent of a company’s profits. Accordingly, Zambia’s tax burden is ranked 37^th out of 183 nations.

When it comes to engaging in cross-border trade, Zambia’s scores plunge again. In Zambia, to import goods into the country one is required to have eight documents for customs’ officials to inspect. On average, it takes a total of 56 days to import goods into Zambia with the cost amounting to $3,315 (excluding tariffs) per container shipped into the country.

The cost to export goods, though, is smaller as Zambia requires only six documents to be inspected by customs’ officials, while the total cost (excluding tariffs) is $2,664 per container, with delivery taking up to 44 days from point of origin. Compared to global averages this nets Zambia a ranking of 150^th out of 183 on ease of engaging in cross-border trade – largely due to its relatively isolated, landlocked geographic location.

Zambia fortunately does better when it comes to contract enforcement, where it ranks 86^th out of 183 countries ranked on this issue by the bank. On average, reports World Bank analysts, it takes a total of 35 legal procedures to take a contract from dispute to resolution, at the cost of 471 days, or about a year and fourth months, spent in court or otherwise attending to legal issues.

The financial cost of pursing a contract claim, says the Bank, typically accounts for 38.7-percent of the value of the claim.

Finally, in terms of closing or liquidating a business Zambia ranks 90^th out of 183 countries. Here, it takes 2.7 years to close an estate at a cost of nine percent of the value of said estate, for a recovery rate of 27.2 cents on the dollar.

Table 1 presents a summary of these rankings as well as Zambia’s overall ease-of-doing business rating.  As one can see, Zambia’s scores seesaw wildly from area to area. Zambia is a good place to start a business, obtain credit, or pay tax, but a very difficult place to obtain construction permits or to engage in international trade.

Table 1:

World Bank Ease of Doing Business

Assessment and Rankings: Zambia

Prospects

As the figure below demonstrates, Zambian economic growth since the reform era in the early 1990s has been both strong and consistent. Over the past decade the Zambian economy has averaged 6.2-percent growth with a slight uptick over this average in the last few years. Zambia has also gone from a country that typically experienced annual double-digit inflation rates during the 1980s to one where, today, inflation has been kept in the high single digits through sounder macroeconomic management of the economy. So, in real terms, this growth has delivered substantial improvements to Zambians.

Figure 3:

Zambian Economic Growth,

Percent Increase, 2003 – 2013

That said, Zambia remains an underdeveloped economy in every sense of the word. Like with many such countries, Zambia is dependent upon one primary product – copper – for export earnings. With Chinese growth over the past two decades having exploded copper prices, this has greatly enriched the Zambian economy. Unfortunately, while the copper-mining industry is by far the most important sector, it is very capital intensive and as a result employs relatively few people – certainly not enough to provide jobs for all those who need them. As a result most Zambians are employed in low-end services and agriculture, the latter of which is particularly low in productivity due to a lack of capital, modern technology, and, ironically, labor.

Agriculture’s labor shortage, however, has a silver lining as it is caused by the fact that Zambia is one of Africa’s most urbanized countries, with fully half the population living in towns and cities that have grown up along transport corridors that link Zambia’s copper mines with export markets in neighboring countries. While putting the squeeze on agriculture, this shift of population from rural to urban is a critical development as it has pooled and made accessible to entrepreneurs large amounts of relatively inexpensive labor that could be easily directed into light manufacturing.

For that to happen, though, further reforms and investments need to be made. As noted above in the discussion of business conditions in Zambia, obtaining construction permits is inordinately difficult – making property improvement, let alone the construction of factories an expensive endeavor. Clearly this situation needs to be improved before manufacturing can develop fully.

Transport, too, needs to be radically improved. Being landlocked, Zambia must necessarily transport its goods to export ports in other countries. Unfortunately, its neighbors have equally bad transport networks that desperately need investment, which explains the high cost of engaging in cross-border trade.

This transport bottleneck not only limits Zambia’s ability to export copper, but also limits the manufacturing potential of its growing cities. Without better links to the outside world, it is thus difficult to see how Zambian manufacturing could be competitive with the rest of the world.

Fortunately, demand for copper is such that outsiders may actually be the ones to improve Zambia’s, and the region’s, export infrastructure.

China, for instance, has gone on something of a railway-building spree throughout Africa, Zambia included. Chinese firms, supported by the government in Beijing, have invested in Zambia’s state-owned railway network, particularly in TAZARA – the Tanzania Zambia Railway that links Zambia’s copper belt with ports in Tanzania.

First built in the 1970s as Chinese foreign aid for a socialist ally in the Third World, today the railway has become a strategic part of China’s bid to source desperately-needed raw materials and develop markets in Africa. Indeed, as Zambia’s largest trade partner China would appear to have a vested interest in ensuring the country’s copper continues to flow unimpeded to copper-hungry Chinese factories.

Finally, Zambia also has problems typical of most recently democratized country. Though power was turned over freely to the opposition in free-and-fair election in 2011, concern has nonetheless developed over the degree to which Zambia seems to be backsliding on democracy.

Corruption, for instance, remains a problem that is seen as diminishing the rule of law in Zambia, while dissent critical of the government has led to a something of a crackdown by the authorities.

Moreover, the rising Chinese influence in Zambia has lessened Lusaka’s appetite for Western aid that might otherwise have been used as a leverage for further democratic reform.

Given this, what can investors expect out Zambia? In the short run, current market uncertainty over short-run Chinese growth prospects and a continued lackluster economic performance in the West is likely to put a further damper on the all-important price of copper. As a result, there may be some delay in large-scale transport investments that are needed to bring Zambia closer to world markets.

In the long run, however, the need for copper will no doubt rebound and better transport links with the outside world – if they are ever built – could make Zambian-sourced manufacturing more competitive. Coupled with political stability and the outside chance of further improvements in democratic governance, Zambia’s future could be as bright as its copper.

Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.