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ANALYSIS OF DIVERSIFICATION STRATEGIES IN SUB-SAHARAN AFRICA IN VIEW OF CHINA’S RISING TRADE PROFILE:

The case of Zambia.

BY

AARON BANDA

This paper was submitted in partial fulfillment of the Requirements for the award of The Postgraduate Diploma;

International Trade Policy and Trade Law (Intermediate)

Awarded by

Trade Policy Training Centre in Africa

[trapca] P. O. Box 3030 ARUSHA TANZANIA

November 15th 2014

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DECLARATION

I …AARON BANDA.., declare that I am the sole author of this research paper, and this research

paper is a result of my own research work, and where other people‟s research was used, they

have been dully acknowledged.

Date…11 NOVEMBER 2014….. Signature …………………………………

CANDIDATE

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ABSTRACT

This paper analyses Zambia‟s diversification strategies in awake of China‟s rising trade profile.

The paper focuses on the Zambia export diversification process and offers policy

recommendations. Since significant trading has taken place between China and Sub-Saharan

African (SSA) countries for more than a decade, it is undoubted that China has been a stable

trading partner and assured market for most SSA countries. Statistics show that from 2005 to

2007, the trade volumes from China to Africa in general increased from 2.5 percent to 3.8

percent, making Africa the third largest export market after USA and EU.

Zambia‟s export basket mainly consists of raw materials or primary goods and offers a few

tradeable services to China. The scenario has resulted in perpetual exploitation of natural

resources to sustain the balance of payments (BOP). Scholars, like the classical theorists, would

advocate for this arrangement since Zambia is utilizing its known comparative advantage.

Others, the neo-classical, would argue it as exploitation by major merchandisers of the less

developed nations by promoting primary exports to satisfy their ever growing consumer markets

both internally and abroad too. It is hoped that the paper will make a modest contribution to

remedies needed to promote export-led production and eventual export diversification efforts.

The research findings were based on the bilateral trade data from World bank WITS, UN

Comtrade, Trademap, as well as several empirical studies related to the topic. The data focused

on the changing trade structure and trends between China and SSA from 2003 to 2013, and

narrowed down to trade statistics between china and Zambia between the same periods. The

analysis showed that Zambia, as well as most of the SSA countries, wants to diversify its

economy. It came to light that, to some degree, for a country to diversify, it requires to critically

identify the sectors that can make it easy to achieve the intended goals or objectives. A country

also vitally requires policies measure that can easily be implemented.

Zambia‟s export diversification strategies have not fully been realized due to various obstacles

outlined in this paper. The rising trade profile of China has given Zambia an opportunity to speed

up the implementation of identified strategies and become competitive globally as stipulated in

the VISION 2030 development plans.

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CONTENTS

DECLARATION…………………………………………………………………………3

ABSTRACT………………………………………………………………………………4

LIST OF ABBREVIATION AND ACRONYMS………………………………………7

LIST OF FIGURES AND TABLES…………………………………………………….8

1. SECTION 1

INTRODUCTION…..…………………………………………………………………..9

1.0 PROBLEM STATEMENT……………………………………………………………12

1.1 RESEARCH QUESTION…………………………………………………………….13

1.2 SIGNIFICANT OF STUDY………………………………………………………….13

1.3 METHODOLOGY…………………………………………………………………..14

2. SECTION 2

BACKGROUND AND LITERATURE REVIEW.……………………………………15

2.0 CONCEPT OF DIVERSIFICATION……………………………………………………….15

2.0 TRADING PATERNS BETWEEN SUB SAHARAN AFRICA AND CHINA…………..16

2.1 EXPORT DIVERSIFICATION IN SUB SAHARAN AFRICA……………………………20

2.2 ZAMBIA‟S ECONOMIC OUTLOOK AND TRADE WITH CHINA……………………..21

2.3 ZAMBIA‟S EXPORT DIVERSIFICATION STRATGIES…………………………………24

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3. SECTION 3

3.1 RESEARCH DESIGN AND METHODS……………………………………….27

3.2 DATA……………………………………………………………………………28

3.3 STRENGTHS AND WEAKNESSES OF THE STUDY…………………………….28

4 SECTION 4

4.1 RESULTS ……………………………………………………………………….29

4.2 DISCUSSION……………………………………………………………………34

5 CONCLUSION…………………………………………………………………………….36

5.1 SUMMARY…………………………………………………………………………36

5.2 DISCUSSION OF IMPLICATION OF THE FINDINGS………………………….37

6. REFERENCES…………………………………………………………………………38

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ACRONYMS AND ABBREVIATIONS

SAA SUB-SAHARA AFRICA

USA UNITED STATES OF AMERICA

EU EUROPEAN UNION

UN COMTRADE UNITED NATION COMMODITY TRADE STATISTICS

DATABASE

FDI FOREIGN DIRECT INVESTMENT

OCED ORGANIZATION FOR ECONOMIC COOPERATION

AND DEVELOPMENT

GDP GROSS DOMESTIC PRODUCT

ITC INTERNATIONAL TRADE CENTRE

WTO WORLD TRADE ORGANIZATION

WB WORLD BANK

IMF INTERNATIONAL MONETARY FUND

CSO CENTRAL STATISTICS OFFICE

MOF MINISTRY OF FINANCE

BOZ BANK OF ZAMBIA

ZDA ZAMBIA DEVELOPMENT AGENCY

MCTI MINISTRY OF COMMERCE, TRADE & INDUSTRY

MFEZ MULTI-FACILITY ECONOMIC ZONE

UNCTAD UNITED NATIONS CONFERENCE ON TRADE AND

DEVELOPMENT

ECA ECONOMIC COMMISSION FOR AFRICA

WITS WORLD INTEGRATED TRADE SOLUTIONS

ZACCI ZAMBIA CHAMBER OF COMMERCE AND INDUSTRY

ZRA ZAMBIA REVENUE AUTHORITY

FAO FOOD AND AGRICULTURE ORGANIZATION

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List of Figures

Figure 1: The Top five Chinese trading partners in SSA………………………………………...18

Figure 2: Comparison of imports and Exports between SSA and China 2000 and 2009………..19

List of Tables

Table 1 African exports to China 2012………………………………………………………….17

Table 2: Zambia‟s GDP annual growth-2004 and 20014……………………………………….24

Table 3: Zambia-China trade and development Indicators: 2003 to 2012………………………29

Table 4: Sample summary of Zambia‟s product diversification and concentration…………….31

Table 5: Trade volume: Bilateral trade Zambia and China 2013………………………………..41

Table 6: Herfindahl-Hirschman product concentration Index…………………………………..32

Table 7: Export market penetration 2003 to 2012-China and Zambia………………………….33

Table 8: Commodity cluster for Zambia………………………………………………………..33

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SECTION 1

INTRODUCTION

For the past decade, Sub-Saharan Africa (SSA) countries have been striving to promote export

diversification by production of intermediate goods as way of adding value to the exports. Over

the same period, a relatively robust growth for SSA has been registered. Without a doubt, as

Fantu (2010) observed, rising price of oil from Angola, Ghana and Nigeria has certainly played a

role in determining the high growth rates in many of SSA countries, but even excluding oil rich

countries the overall growth has been averaging over 4.5% since the mid-1990s.

However, the existing technologies, human resources, infrastructure, formulated policies and

institutional structure in most SSA countries make it challenging for these countries to compete

globally in terms of quality tradeable goods and services. Equally to implement export

diversification strategies in such a structurally challenged environment is not an easy

undertaking, concluded in the FAO report.1

Despite the structural challenges highlighted above, during the last decade, trade between SSA

and China has increased dramatically. Exports to China in the past five years (2008 to 2013)

have been growing at an average rate of 48 percent per year, and now account for a tenth of all

exports (Chen, 2007). The sustained rapid growth of the Chinese economy has necessitated a

large demand for many of Africa‟s major export commodities, like oil and other raw materials

such as minerals, metals, and timber.

It should be noted that some SSA countries have to some extent diversified and even moved up

the technology ladder in term of production techniques, and China serves as a huge export

market for goods such light manufactures or semi-processed agricultural goods. On the other

hand, SSA has seen a surge in imports of China‟s cheap or affordable manufactured goods.

1 www.fao.org/docrep/003/y0491e/y0491e04.htm

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Value of imports totaled over US$15 billion in 2005 alone, and climbed by 42.9% the following

year (Broadman 2006, The Economist 2007).

Valid concerns, nevertheless, from informed individuals, governments and international

institutions on perceived potential for increased growth that trade with China brings to SSA, are

still under debate. There are different view points on the nature and real value of China-SSA

trade flows, as to whether or not they are actually beneficial for the development, export

diversification and even long-term growth of the SSA region. This is a valid concern since SSA

remains the poorest region in the world according to World Bank report.2

Nonetheless, there are many potential benefits from increased trade with China, both in relation

to growth and development in general. Chen (2007) gives two main reasons in his analysis. First,

China is almost a natural trading partner with most African countries, as significant

complementarities in their natural endowment of resources occur. As China‟s demand for

Africa‟s resources continues to soar, increased world prices of primary commodities may

improve the terms of trade for the African countries. Second, as China becomes a major player in

the world economy, its industries are rapidly modernizing. This means it has a growing middle

class with increased purchasing power, hungry for imports.

Moreover, Broadman (2006) adds that this demand not only includes traditional agricultural

exports, but non-traditional exports ranging from light manufactured products and household

consumer goods to processed commodities and tourism.

This scenario set a platform for most SSA countries to increase their export basket to China

using well defined export diversification strategies. This demand by Chinese middle class is

indeed good news, indicatively that there are also many export opportunities awaiting SSA.

Successful and competitive Chinese industries are growing larger, and in turn, they will count on

primary and intermediate supplies from SSA countries for their inputs. China‟s growing

economic affluence has also meant shifts in its comparative advantage within and across certain

industries. 2 http://www.worldbank.org/content/dam/Worldbank/document/State_of_the_poor_paper_April17.pdf

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Many imports from Africa are and will be needed to support these shifts. One example is the

increased imports of cotton in recent years from countries such as Cameroon and Tanzania.

Cotton farmers in China have switched to more profitable crops, and thus cotton imports were

needed to meet the demands of China‟s booming textile industry (Jenkins and Edwards 2006).

Zambia is part of the SSA region and preliminary indicators show that the trade patterns with

China shown similarity amongst most SSA countries. Zambia and China have signed a number

of bilateral agreements. The significance of Zambia and China long relationship was highlighted

in 2013 by a Chinese Minister of Commerce who said that the fact that the Zambia-China trade

volume rose from $100 million to $3.4 billion demonstrated that the two economies were keen

on the expansion of their domestic markets.3

He further added that China was willing to work

with Zambia to increase imports from Zambia to promote balanced and sustainable development

of bilateral trade.

This bilateral trade and other factors highlighted above should essentially create a platform for

extensive trade between the two countries, and Zambia is well placed to promote and implement

meaningful export diversification. The main areas of diversification put in place the governments

are:

i) agriculture, forestry and fisheries

ii) manufacturing (including agro-processing)

iii) gemstones and other non-traditional mining

iv) tourism

v) Multi-Facility Economic Zones

vi) financial services (including micro-finance)

3 www.trademarksa.org

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Over the past decade Zambia has liberalized its economy, promoted private sector export-led

economic growth and of course stability in microeconomic through monetary and fiscal reforms.

However, this paper‟s main focus is the export diversification strategies implementation.

The fact that China is rising in its trade profile with SSA countries, gives Zambia an advantage to

foster accelerated implementation of the export diversification strategies.

1.0 Problem Statement

Acknowledging that the above analysis is common in most SSA countries, gives an entry into

investigations. Zambia has been trading with China as long as many SSA countries have been.

But in last decade China has recorded tremendous GDP growth, surpassing Japan to be the

second biggest economy in the world. This increase in economic activities has been observed in

many SSA countries, through increased import demand.

In Zambia, this has prompted the Ministry of Commerce, Trade and Industry, Zambia

Development Agency and Ministry of Finance to actively promote export diversification with the

view of expanding the country‟s export basket into Chinese growing markets. In the mean time

some scholars support the idea of export diversification; while others are skeptical about it,

arguing that Zambia‟s core activity is mining and the market will always be readily available.

The opposers have contended that Zambia‟s diversification strategies implementation is

nonexistent, slow and sometimes unclear.

Hence, the paper analyses why the implementation of Zambia‟s export diversification strategies

seems to be unclear, slow or nonexistent and not yielding expected theoretically results in view

of perceived good trade relations with China.

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1.1 Research Questions

The main question that this research answered was why the Zambia‟s export diversification

strategies are not yielding expected results in view of china‟s rising trade profile on Sub-Saharan

Africa. Flowing from this question, the following sub-questions were answered:

i) What is the trade volume between china and Zambia and indeed between SSA

countries in general?

ii) What are Zambia‟s areas of economical diversification strategies and

implementation?

iii) Will significant diversification be achieved when the core activity in Zambia is

mining?

1.2 Significant of Research

Many scholars have generally written a number of papers on trade and diversification strategies

on Sub Sahara Africa for a decade or more. But none as far as this research is concerned has

focused on Zambia‟s diversification strategies implementation in relation to China‟s rising trade

profile. This study makes a modest contribution in terms of knowledge and literature on

Zambia's diversification strategies in relation to trade with China. The study may or will also

assist in some way the government departments and policy makers in addressing policy

implementation and monitoring.

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1.3 Methodology

Essentially, this research paper was desk-based. In carrying out this research data collection

came from investment agreements, trade reports and bulletins from government departments

serving as primary data source. Secondary data sources included scholarly journals, periodicals,

and international institutions dealing with trade, World Wide Web sites, and newspapers.

This paper is divided into four sections. There is an introduction in section one, which brings a

background to the research concept, research questions including justification and method of

research.

In section two, the historical background and empirical evidence on trade between China and

SSA countries is given through literature review. Also the main purpose of research focusing on

Zambia is reviewed in detail, giving both narrative and graphical presented. The section answers

the questions on trade volumes between Zambia and China, areas of Zambia‟s export

diversification strategies and challenges in implementation of these strategies.

Section three gives research design and method. A strengths and weaknesses of the study are

outlined in this section.

In section four, the summary of research and findings are outlined, and finally, a conclusion is

drawn with some policy recommendations.

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SECTION 2

BACKGROUND AND LITERATURE REVIEW

2.0 Concept of export diversification

Export growth and export diversification are positively associated with economic growth.

Particularly, export diversification is widely seen as an important channel through which trade

fuels economic growth; by facilitating improvements in productivity, by capturing economies of

scale, and by curbing income volatility (Newfarmer, et al, 2009). This is the assumption on

which most econometric models base the hypotheses.

Further explanation of export diversification includes growing at the intensive margin (growth in

the value of existing products) and extensive margin (the increase in the number of export

lines).4 In other words, export diversification can be captured along the margins: a more evenly

spread of the export basket is an indication of diversification at the intensive margin, while the

greater number of export lines indicate diversification at the extensive margin (Cadot et al.,

2011).

It should be mentioned here that the debate on export diversification has been a long standing

topic. The most cited case is the Latin American countries between the mid-1960s and late

1990s. The analysis was that exportation of primary goods creates volatility and low productivity

in an economy, this argument usually cited from seminal works of Prebisch (1959). This is taken

in context of traditional usage of diversification which means the moving away of mineral

dependence to low value manufacturing products.

But considering the recent literature growth on this debate, Sachs and Warner (1995) argued that

there is an inverse relation between natural resources intensity and growth. Still Lederman and

Maloney (2003) proved that Sachs and Warner's assertion that resource abundance adversely

4 Amurgo-Pacheco, A. and Pierola, M.D. 2007. Patterns of Export Diversification in Developing Countries:

Intensive and Extensive Margins. Economics Section, The Graduate Institute of International Studies. HEI Working

Papers 20-2007.

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affects growth is found not to be robust to the chosen measure of resource abundance or

estimation technique; though both writings gave their reasons as to why diversification strategies

put in place in the last half century in South American region have failed.

However, Herzen and Nowark-Lehman (2004), analyzing the Chilean experience, investigated

the hypothesis that export diversification is linked to economic growth through externalities of

learning activities related with exporting, and they concluded that export diversification on the

basis of natural resources has a positive influence on growth.

Although the benefits of a diversified export base have been well-established in various

literatures, there exists no unified theoretical framework to rely on when it comes to uncover the

macroeconomic drivers of export diversification stated Bebczuk and Berrettoni (2006).

Furthermore, trade research treats export diversification from a social, aggregate standpoint;

while the decision to diversify is made by individual firms from the private sector (provided the

government has no decisive influence on export markets, as it is the case in many countries).

The Bebcsuk and Berrettoni (2006) paper “Explaining Export Diversification” concluded that

export diversification has been increasing in most countries; particularly in South America and

Africa, displaying levels of export concentration higher than other regions, which are not

explained by measurable macroeconomic factors. This usually offers a challenge to many

researchers especially in Africa where trade data is scantly recorded or missing.

2.1 Trading patterns between Sub-Saharan Africa and China

After theoretical analysis of export diversification with examples above, how do many SAA

countries tackle the challenges export diversification brings? SSA countries' pursuing of

diversification or specialization in export production has been a wide topic that has generated

much discussion in the theoretical literature and in policy spheres. Broadly seen, one strand of

the literature advocates greater export diversity as good for economic boost and development,

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while another sees specialization, in relation to a country‟s comparative advantage, as more

appropriate.

Table 1 below show a snapshot of the trade flow values between some SSA countries and

China, with oil registering high percentage exports.

Source: ecdpm.org

China‟s GDP (about 9.4 trillion US dollars) in recent times is far higher than any of African

country. On economic basis, China is relatively higher than any of the African countries.

Moreover, China has a sustained growth rate of between 8.0 and 11.0 till now which begun in

mid-1990s.

The European Journal of Development research (2009) explains that increased China trade

relations can be attributed to three (3) factors. First, reported high sustained economic growth

rate over the two decades, resulting in increased GDP. Second, population growth, about 20

percent of world total, combined with rapid rising income providing massive domestic economic

base for stimulating growth. Third, China has rapid growing economy based on export-led

strategy. Undoubtedly, these underlying factors make China trade massively with Africa as well

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as globally. Furthermore, industrialization in china has contributed to high demand for imported

inputs. Certainly, trade flows between Africa and china have been growing rapidly over time.

In aggregate terms, African‟s merchandise exports to China increased over fourfold from US

$4.5 Billion and US$8.3 Billion in 2000 and 2007. On the other hand, Africa‟s aggregate imports

from China increased from US$10 billion to a record US$37.1 billion. Figure 1 shows top

China‟s SSA trading partners and import and export growth between 1996 and 2010.

But what do these countries export to China? The obvious answer is oil and minerals.

Figure 1: The five top Chinese trading partners in SSA

A new world power, China, has emerged in recent years and its activities have definitely affected

the SAA‟s economic activities. China relations with Africa in general grew by 700 percent in the

90‟s (Corkin, 2007; Servant 2005) and it is based on a strategy of multipolarity and non-

intervention (Tull, 2006). This approach which is backed by increased aid, debt cancellation and

Chinese interest in oil has been beneficial to the elite of SSA.

Overall, China‟s foreign policy especially with many African countries is becoming more

dynamic, flexible and accommodating to the realities of the 21st century observed Sutter (2004).

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China‟s presence in Africa is doubtlessly beneficial, for example the trade between China and

Africa in 2006 was totaled about $50 billion. Chinese companies continue to import oil from

Angola, Sudan, Nigeria, copper from Zambia, Congo and other mineral resources from other

SSA countries (Zafar, 2007).

The recent surge in China- Africa trade is due to Chinese foreign policy, Africa‟s demand for

infrastructure and China‟s approach to financing (Wang, 2007). Among the skeptics, Ademola

et.al (2009), suggested that the China-Africa trade might not be beneficial to Africa countries in

terms of export diversification because the relationship creates a disincentive for the region‟s

long term objective of diversification.

Figure 2: Comparison of Imports and Exports between SSA and China-2000 to 2009

Figure 2 show the commodity movement between the two markets-SSA and China. It will be

observed that China imports primary goods like food, live animals, beverages, tobacco minerals

although mineral fuels and lubricants; and crude materials dominate China‟s „shopping list‟. On

the other hand, SSA market import most machinery and transport equipment. The volumes of

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commodities also are more on the SSA export side and less of the China export side, meaning

unbalanced trade terms exist. This gives rise to a question; is China‟s rising trade profile

encouraging SSA to diversify their exports?

2.2 Export diversification in Sub-Saharan Africa

By the end of the decade, 2010, the African continent was the highest in term of dependence on

primary goods exports. Due to instability of prices of the primary goods, most countries in SSA

have negative terms of trade. This has awakened many policy makers to turn to export

diversification as a solution. As earlier alluded to, the recent underlying theory in support of

export diversification was hypothesized by Prebisch-Singer as remedy for low economic growth

nations as laid out by development economics already in its early stages (Naude & Rossouw,

2008).

Diversification offers the advantage of creating a more stable income flow and consequently the

basis for substantial solid growth, as suggested by Sachs and Warner (1995). Besides existing

stability argument, also dynamic gains are attached to export diversification. Notable knowledge

spillovers as by-products of export diversification are believed to benefit the economy in terms

of management and marketing practices, higher productivity, the creation of new industries, and

consequently higher growth (Amurgo-Pacheco & Pierola, 2008). Therefore, a country must put

in place well formulated strategies for export diversification to be fully achieved. These can

either be expanding horticultural or other natural resources-based products, services, and high-

value manufacturing products. The process also means that diversification should be vertical as

well as horizontal.

A focus on export diversification as a growth strategy has gained momentum. With SSA‟s

annual growth of 6.5 percent GDP between 2002 and 2008, in midst of civil strife, poor

institutional structures and vulnerability of primary goods exports, it sends a positive signal for

further and robust growth in most SSA countries if export diversification strategies can succeed.

Furthermore, on real GDP growth, in Sub-Saharan Africa remained robust at 5.1 percent in 2013

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as compared to 4.8 percent in 20125. This was mainly on account of increased investments in

infrastructure, trade and investment ties with the emerging economies, principally with China.

In summary, so far SSA export diversification process has been unsuccessful. The Economic

Commission for Africa (ECA) and the African Union (AU) concluded this way, “it appears that

episodes of diversification in Africa have been sporadic and short-lasting” (UNCTAD, 2008, p.

19).

2.3 Zambia’s economic outlook and trade with China

Historically, China and Zambia have signed several bilateral and multilateral trade agreements

on economic and technical cooperation. From the year 1967 till now, China has undertaken 35

aid-projects such as Tanzania-Zambia Railway (TAZARA), roads, maize flour factory, textile

mill, well and water supply. Of the projects, 33 have been completed. Besides provision of these

aids to Zambia by the Chinese government, trade between these two countries has been enhanced

by both governments encouraging their citizens to participate in direct products exports, expos

platforms, international exhibitions forum besides the mining activities carried by local and

foreign companies. While, the country enjoys lower prices from a wider number of products

ranging from intermediate and final ones, it should be mentioned here that the government has

been encouraging non-traditional exports besides the traditional exports to promote

diversification.

A brief economic outlook narrative here will give an insight in Zambia‟s strides in promoting

export diversification. Zambia has taken up direct initiative to promote trade with China as was

noted by then Minister of Finance Mr. Peter Magande “It is exciting that China has opened up its

market to 452 Zambian products from the previous 192 products, and the best thing is that

Zambians can now borrow money from the Bank of China to manufacture goods required to

export to that market.”6 This means that Zambia‟s export basket to China included a number of

new non-traditional products as a report from Ministry of Finance shows below.

5 Schaffnit-Chatterjee. C (2013), Sub Saharan Africa : A bright spot inspite of key challenges

6 http://www.lusakatimes.com/2007/02/05/china-offers-zambia-tariff-free-market-access/

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In answering questions from the media by the Ministry of Finance about performance of non-

traditional exports (NTEs), the response was “in 2013 Highest NTEs were cement and lime (US

$234 Million); Gemstones (US $220 Million);Tobacco (US $215 Million); Sugar cane (US $184

Million); Maize (US $151.9 Million); Cotton (US $85 Million). In terms of projections, NTEs

have been rising by over 20% per annum and we expect this growth to continue”.7

A preliminary report of Zambia economic performance by Bank of Zambia (2013) indicated that

trade volumes showed an increase in the fourth quarter of 2013 by 2.1 percent ($5330.4 in 2012

to $ 5441.1 in 2013). The report further highlighted that in terms of exports, China ranked second

Zambia‟s market with percentage increase of 40.1 mainly contributed by base metals exports.

This is against import decrease of about 5.1 due to reduction of industrial equipment importation.

The conclusion was that Zambia international trade remains strong “on account of high metal

and non-traditional exports, as metal prices on the global market are forecast to be relatively high

during the quarter” (BOZ, 2013).

An additional report from the Ministry of Finance (2014), states that Zambia‟s main export

product, copper, had an increase in production capacity to 790 007 metric-tonnes from 785 642

metric- tonnes. Annually, the Zambian government has projected that copper production to

increase from the current figure to 1 000 000 metric tonnes by the year 2017. This is a bit

ambitious, however this mean increased in industrial activities linked to this sector.

To promote value addition to most exports, China‟s trade relationship with Zambia has recently

moved a step higher by the creation of Multi-Facility Economic Zones (MFEZ). The MFEZ have

replaced the Export processing Zones, which could not become fully functional. This

arrangement will help in attracting larger investors who in turn will facilitate technology transfer,

raise standards of production and promote highly quality exports. This arrangement had its

inception in 2001, as an export-led industrialization policy, working as Zambia China Economic

and Trade Cooperation Zones (ZCCZ).

7 Zambia: Ministry of Finance posts a Q & A on state of the economy on its Facebook page and website, June 2014.

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The ZCCZ arrangement has multiple objectives including:

(i) Enhancement of foreign exchange earnings by promotion of exports of non-traditional

manufactured goods;

(ii) creation of jobs and generation of income;

(iii) improvement of competitiveness of exporters; and

(iv) attraction of FDIs with its attendant technology transfer, knowledge spillover,

demonstration effects, and backward linkages. Of course ZCCZ initiative works in

conjunction with ZDA which is a country‟s working development Act of 2006.

The economic outlook presented above gives a positive indication on the need for the economy

to diversify. Interestingly, Zambia‟s GDP growth has been on an average of 6 percent for the last

decade. Empirical literature, among wide range country characteristics that have been tested, the

key determinants of export diversity include distance from the major markets, country size and

market access (bilateral and multilateral trade arrangement).

It is no doubt that Zambia‟s GDP growth can be attributed mainly to exports of minerals and

other natural resources provided by the Chinese market besides the inflow of foreign direct

investments. Table 2 gives a trend of the GDP growth from 2004 to 2014. The period between

2010 and 2013 shows high GDP values because of the improved copper prices on London Metal

Exchange (LME). The prices however, have shown a slight decline this year.

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Table 2: Zambia’s GDP annual growth -2004 and 2014

The link between GDP and diversification is observed from the export concentration of a

country. High export concentration on primary good results in volatility in export earnings and

deteriorating terms of trade (Jansen, 2004). Consequently, Ramey and Ramey (2006) hinted that

countries with higher GDP experience less volatility. Zambia‟s GDP is said to be growing

steadily, but is the country‟s economy less volatile in terms of trade? Does the country exhibit

high export concentration in primary goods? The analysis will develop further insight into these

questions matter.

2.4 Zambia’s export Diversification Strategies

While, Botswana belonging to SSA region, is seen as a country that has made effective use of its

mineral wealth – diamonds – to transform itself from a poor, landlocked semi arid country to a

middle income country, many institutions local and international (OCED, Investment Policy of

Zambia, 2011) have agreed that most developing countries need to diversify in order to maintain

a sustained economical growth and prosperity.

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UNCTAD stated that “promotion of NTEs and private sector development” were two main

pillars of sustained high economic growth in Zambia.8 It is further argued that given the

country‟s natural resources, Zambia has high potential for export diversification especially into

agriculture, agro-processing, tourism, textiles and light manufacturing. Nevertheless, the existing

strategies and the processes of implementation remain opaque.

Most of the Zambia‟s export diversification strategies are based on the Sixth National

Development Plan 2011-2015 (SNDP) and VISION 2030, the government documents produced

in November 2011 and December 2006 respectively. These strategies are mainly in agriculture,

services and industrial sectors. The Vision 2030 document was the longest-term written plan the

country had ever had and was as a result of nation-wide consultations involving various

stakeholders including traditional leaders, civil society, private sector, government departments,

cooperating partners and the ordinary citizenry (Vision 2030, p.1). The Vision 2030 document on

economic diversification strategies are summarized in Annex 1 of the document

Among the main reasons given for exports diversification are economic growth, and

improvement of the citizen‟s welfare. Another reason is that, the concentration on primary

products for export is believed to inevitably deteriorate a country‟s terms of trade (TOT) that is

the ratio of a country‟s export and import prices.

Some of the strategies listed in keys are; in agriculture- to establish an efficient, competitive,

sustainable and export-led agriculture sector that assures food security and increased income by

2030; and in manufacturing- to have technology based and export focused manufacturing sector,

which is dynamic and competitive with effective entities that add value to the locally abundant

natural resources by 2030 ( Annex 1, p.30).

Since most of the strategies are long term, creation of trade policy analysis units in relevant

ministries, as well as setting up of Zambia Institute for Policy Analysis and Research have been

necessary. The government has also been working on enhancing capacity to formulate,

coordinate, and implement trade policy and negotiate trade agreements including customs

8 UNCTAD, Growing Micro and Small Enterprises in LDCs, Geneva, 1997, pp70-90

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clearance and trade facilitation issues as an important agenda item for the National Working

Group for Trade.

A journal for the Zambia Chamber of Commerce and Industry (ZACCI) added that for the

sustainability of diversification strategies put forth the country‟s development plans , the BOZ

policy measures relating to inflation and currency depreciation should be checked and maintain

to reasonable levels for the benefit of export sectors. The same article entitled Policy News

concluded that “the government should continue to resist the vested interests that want to keep

imports cheap, at the expense of economic diversification and long term growth”.9 This was in

reference to the interests of citizens so that political patronage is maintained can support the

ruling government.

In conclusion, these key government institutions, the Ministry of Commerce, Trade and Industry

(MCTI), Zambia Development Agency (ZDA) Bank of Zambia (BOZ) and Zambia Revenue

Authority (ZRA) have all been tasked with the implementation and monitoring of the country‟s

trade policies in line with the VISION 2030 document. The tasks range from policy formulation

on trade, macro and micro economics, and taxes. ZDA specifically tackles export promotion and

diversification of the economy.

9 Isaac Ngoma, 2014 ZACCI Journal

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SECTION 3

RESEARCH DESIGN AND METHODS

3.1 Method

The paper‟s analysis dealt with both Zambia‟s market and product concentration indices. Since

the paper was dealing with export diversification, the broadening range of products that a

country exports, a connection between export diversification and economic theory was

established in literature review. From the literature reviewed, indications are that export

diversifications contribute to economic growth. This relationship is argued from a theoretical

point of view that a country‟s increase of products in its export basket (either vertical or

horizontal diversification) brings economic gains (Cadot et al., 2011).

Data obtained from the World Bank WITS, International Trade Centre TRADEMAP and

ITRACEN databases about Zambia, is presented in tables and the results interpreted accordingly.

The assumption has been that market and product diversification are closely tied to economic

development, with more advanced economies exporting a wider range of goods to a greater

number of trading partners. These indicators together provide perspective on the degree to which

countries are taking advantage of potential trading relationships. The Herfindahl-Hirschman

Market Concentration Index measures dispersion of trade value across an exporter‟s partners. A

higher value indicates greater concentration of value across products or partners10

.

The Index of Export Market Penetration measures the extent to which a country‟s exports reach

already proven markets. It is calculated as the number of countries to which the reporter exports

a particular product divided by the number of countries that report importing the product that

year. A low export penetration may signal the presence of barriers to trade that are preventing

firms from expanding the number of markets to which they export (wits.worldbank.org).

10

http://wits.worldbank.org/WITS/WITS/TradeIndicatorsHelp/TradeOutcomes_Help.htm

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3.2 Data

The data used was compiled from various sources –World Trade Flows database, which contains

information on bilateral exports of Zambia and China for the period 2003 to 2013. Annual GDP

growth rate were obtained from World development indicators (WDI) database of the World

Bank. Data on exports between Zambia and China was obtained from UN Comtrade database

using World Integrated Trade Solutions (WITS).

3.3 Strength and Weaknesses of the study

The regressions were not run due to lack of skills to carry out diagnostic tests on the econometric

models. The other weakness with this study was the unavailability of data. The focus on Sub-

Saharan Africa, Zambia inclusive – a region for which data is scarce and sometimes unreliable –

made conclusive analysis a challenge.

However, the strength of the study is that latest data was accessed from UN Comtrade, ITC

trademap, and there was efficient application of statistical tools like excel.

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SECTION 4

RESULTS AND DISCUSSION

4.1 Results of export diversification measure

Table 3 contains Market Concentration Index and Index of Export Market Penetration obtained

for Zambia and China cover the years 2003 to 2012, and gives indications in terms of market

access, and number of products. Focusing on the Index of Export Market Penetration, China has

greater value of almost 35 times better more than Zambia. This means that in terms of export

markets for Zambia could lead to increased export diversification.

Equally on the partners and number of products, China is far advanced than Zambia, by ratio of

30 to 1. The conclusion is that in order to increase export diversification, Zambia needs to

discover new markets besides increasing product exports, or negotiate with China for more

market access in it territory.

Further, this means Zambia needs to improve on exports and reduce on imports so that the

balance of trade becomes positive. Diversification can only thrive in an environment where there

are an increased number of products exported by a country, having firmly established

manufacturing sector, and well organized markets.

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Table 3: Zambia -China trade and development Indicators: 2003 to 2012

Country HH Market Concentration Index

Index of Export market Penetration

Number of export partners

Number of Import partners

Number of product exported

Number of product imported

Year

ZAM 0.06 1.59 54 55 115 1041 2003

CHN 0.11 38.74 157 170 4587 4129 2003

ZAM 0.05 1.65 59 60 139 1107 2004

CHN 0.10 41.81 160 172 4636 4205 2004

ZAM 0.14 1.72 57 65 157 1245 2005

CHN 0.09 45.5 166 174 4675 4202 2005

ZAM 0.07 1.64 61 62 148 1296 2006

CHN 0.09 48.62 167 177 4710 4265 2006

ZAM 0.08 1.69 68 67 166 1422 2007

CHN 0.08 50.5 170 181 4725 4107 2007

ZAM 0.08 1.71 64 77 173 1519 2008

CHN 0.08 50.23 167 184 4665 4124 2008

ZAM 0.15 1.72 60 72 214 1388 2009

CHN 0.07 50.3 163 181 4609 4108 2009

ZAM 0.22 1.78 64 80 223 1504 2010

CHN 0.06 51.94 160 182 4541 4159 2010

ZAM 0.16 1.78 65 87 240 1723 2011

CHN 0.06 50.85 152 183 4556 4169 2011

ZAM 0 0 0 0 0 0 2012

CHN 0.07 48.1 139 188 4542 4168 2012

Source: own calculation based on WITS-world bank

Table 4 below, gives a sample of product diversification and concentration for Zambia. The

figures are ranging between 2 and 15. When compared to developed countries, healthful ranges

are between 30 and 100 for product diversification or number of equivalent products for the

period 2009 to 2013. Furthermore, on competitiveness index over the same period, most products

considered for Zambia have negative indices, indicating less performance of products on

international markets.

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Table 4. Sample summary of Zambia‟s product diversification and concentration

Indicator's Description

Fresh food

Processed food

Minerals Basic

manufactures Chemicals

(Value) (Value) (Value) (Value) (Value)

N Number of exporting countries for the ranking in the sector 179 169 168 154 155

G1 Value of exports (in thousand US$) 599,168 697,664 670,140 7,377,113 670,301

G2 Export growth in value, p.a. (%) 31% 39% 3% 24% 66%

General Profile G3 Share in national exports (%) 5% 6% 6% 68% 6%

G4 Share in national imports (%) 1% 3% 26% 11% 17%

G5 Relative trade balance (%) 63% 33% -60% 72% -45%

G6 Relative unit value (world average = 1) 0 0 0 0 0

P1 Net exports (in thousand US$) 465,435 347,914 -

2,084,544 6,217,718 -

1,105,353

P2 Per capita exports US$/inhabitant) 41.2 48 46.1 507.4 46.1

P3 Share in world market (%) 0.08% 0.09% 0.02% 0.55% 0.03%

Position in 2013 for Current Index P4a

Product diversification (N° of equivalent products) 9 15 4 2 4

P4b Product concentration (Spread)

P5a Market diversification (N° of equivalent markets) 7 5 5 3 3

P5b Market concentration (Spread)

C1 Relative change of world market share p.a (%) 20.01% 33.32% -6.48% 13.87% 90.88%

C1a Competitiveness effect, p.a. (%) 21.59% 6.90% -11.72% 4.63% -3.04%

Change 2009 - 2013 for Change Index C1b

Initial geographic specialisation, p.a. (%) 3.26% 3.64% 1.02% -1.25% 4.28%

C1c Initial product specialisation, p.a. (%) -2.25% 13.97% -2.56% 2.98% -10.70%

C1d Adaptation effect, p.a. (%) -2.58% 8.80% 6.78% 7.51% 100.35%

C2 Matching with dynamics of world demand

A Absolute change of world market share (% points p.a) 0.01% 0.01% 0.00% 0.05% 0.01%

Source: intracen.org-trade competitiveness map

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Table 5 on the last page shows trade volume between Zambia and China. It can be observed that

minerals and agric products contribute substantial monetary value, with high growth rate per

annual of over 30 percent. The ad valorem tariff applied to Zambia‟s exports is very low, except

for cotton which is subjected to 40 percent. The high volume exports observed in the table are

minerals.

Table 6 shows a quick comparison of the product concentration index between Zambia and

China. An explanation on the period 2005 to 2008 slump in the graph indicates the financial

global crisis which affected many countries including Zambia and China. The vulnerability of

Zambia products is indicates by the fact that the line on the graph goes up. This in effects

indicates low diversification process.

Table 6: Herfindahl-Hirschman Product Concentration Index

Source: Own calculation based on WITS Comtrade (2014)

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When it comes to the relationship between markets penetration and diversification strategies

Table 7 show clearly that Zambia has a low export market penetration index as compared to

China. This might mean that Zambia is experiencing trade barriers from the trading partners or

inherent internal barriers in the production as well as administration processes within its territory.

And some the internal barriers might include failing to meet the required international standards,

processes and lack of appropriate technology.

Table 7: Export Market Penetration 2003 to 2012: China and Zambia.

Source: Calculated from WITS at 4digits SITC (2014)

The Zambia‟s export basket contains mainly primary products. Table 8 presents a composition

of traded products between Zambia and China. It is can observed that much of the export basket

for Zambia consists of raw materials or semi-processed materials, while the same product in

China commodity cluster shows a less export values.

Table 8: Commodity cluster for Zambia

Source: own calculation based on WITS Comtrade (2014)

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4.2 Discussion:

Given the evidence reported in the literature on the challenges of export diversification on

development and growth, Zambia‟s high concentration in primary commodities implies that the

country may or may not benefit from increasing exports to China. Export concentration in

primary commodities has been linked to inefficiency of institutional and policy reforms.

The fact that China is growing at fast rate and still a developing countries poses trade challenges

on other developing countries like Zambia. First, China‟s demand for production inputs from raw

materials will not reduce soon. Second, since China is still a developing country with a vast pool

of unskilled labour, Zambia like many African countries cannot compete on basis of labour costs.

This means that China‟s exports to the world, including Africa, are expected to keep on growing

which may contribute to preventing or at least delaying the full realizing of export diversification

implementation in Zambia.

This scenario has been observed in EPZs arrangement. Despite the creation of EPZs 2001, few

firms geographically moved to these areas and utilize duty free concessions that were on offer by

the government. After abandoning this initiative, in 2006 the Zambia Development Agency

(ZDA) was created to replace EPZs. The objectives of ZDA were almost the same as EPZs

except on certain provisions of Act on investments. The local entrepreneurs argue that the ZDA

Act favour foreign investment more that the locals investors. This argument has resulted in

slowing the efforts of export diversification which is supposed be enhanced by private sector led

economic development strategy.

The tables above show a number perception into the relationship between China and Zambia and

indeed many SSA countries. As much as trade is appreciated between nations, development

capital or finances do not come from trade only. Economic growth is supplemented by the direct

foreign investments from partner nations and hence, it is not possible to holistically accredit

development or increase in GDP to export strategies that a country puts in place. Therefore,

GDP growth is contribution of foreign aid, private-partnerships projects and concession loans.

35 | P a g e

Therefore, the paper can conclude that as much as strategies for export diversification are put in

place and contribute to the GDP growth, there are other factors that equally contribute to the

economic growth. These other factors include education, technology. And empirical evidence

confirms that indeed there is a recognizable relationship between GDP and diversification.

Finally, Zambia must pursue a dual strategy of diversifying both export markets and product

markets to accelerate growth. Zambia also needs to work to protect market share in existing

commodity markets by retaining and increasing their competitiveness in the areas where they

have a comparative advantage.

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SECTION 5

CONCLUSIONS

5.1 Summary

There is still further work to be done. The analysis in this paper showed that trading between

China and Sub Sahara Africa has been taking place for many years. Further the paper has

supported the growing realization that little or less export diversification is far-reaching and

complex. It is undoubted that as much as many products heading to China from SSA are primary

goods, many manufactured goods moves from China to SSA countries too. The commonalities in

SSA countries‟ trade activities make Zambia no exception in way trade is conducted with China.

It has been established that the substantial trade between China and Zambia mainly in primary

goods, are recorded in World Bank, ITC and UNCTAD databases.

In an effort to increase economic growth and expand the export basket, Zambia has a number of

export diversification strategies. These export diversification strategies are excerpt from the

whole economic diversification targets as reflected in the Sixth National development plans and

VISION 2030 government documents. The process of implementation is facilitated by relevant

government institutions like Zambia Development Agency, Bank of Zambia, Ministry of

Commerce, Trade and Industry, Ministry of Finance, and they are yet to achieve milestones in

trade facilitation and economic diversification.

Lastly, despite government creation of Economic Citizen Empowerment Commission as one of

the initiatives in promotion of value addition of primary goods and, the introduction of Multi-

Facility Economic Zones in specific locations to promote technology transfer and more value

addition to primary goods, it has been established that the core activity of Zambia‟s economy is

copper. This means many other economical activities that are related to this industry, and these

industries do not see the need to change line of business, hence contributing slow pace of export

diversification.

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5.2 Discuss the implications of the findings

The analysis indicates that trade with China has had a positive impact on Zambia. Though the

diversification policies exist, there has been little significant in terms of increased exports in

products and expansion of market access. China‟s rising trade profile has limited impact on

Zambia‟s export diversification strategies as a number of value added products cannot enter the

Chinese markets.

Therefore, the first set of policy recommendations focuses on policies directed at increasing the

amount of trade between China and Zambia, either bilateral or multilateral arrangements. The

critical point is that policies should be formulated to encourage increase in market access in

China. And one of the components to start with is to widen the range sectoral diversification to

meet the demands of Chinese industries that produce for their ever growing middle incomes class

population. This might be in light-manufacturing and food products, or the exploration of

opportunities for tourism.

Addition; our policy-makers should reevaluate and lower the various trade barriers that hinder

increased trade. For instance, some barriers can prevent the necessary materials to enter for

intermediate processing, which means that the country loses out on export opportunities. Finally,

improved education skills will allow the workforce to be more flexible and adaptable to the

demands of the global market in trade. All these policies might help Zambian producers and

exporters take advantage of future demands from the Chinese economic powerhouse.

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Table 5. Trade volumes: bilateral trade between Zambia and China 2013

Product Code

Product Label

Zambia's exports to China China's imports from world Zambia's exports to world

Value in 2013, USD thousand

Annual growth in value between

2009-2013, %,

p.a.

Share in Zambia's exports,

%

Equivalent ad

valorem tariff

applied by China

to Zambia

Value in 2013, USD thousand

Annual growth in value between

2009-2013, %,

p.a.

Share in world

imports, %

Value in 2013, USD thousand

Annual growth in value between

2009-2013, %,

p.a.

Share in world

exports, %

TOTAL All products 2275374 40 21.3 1949934686 17 10.4 10700492 23 0.1

'7403 Refined copper and copper alloys, unwrought 2129089 53 32.4 0.1 24392627 11 36.6 6580673 27 9.4

'2401 Tobacco unmanufactured; tobacco refuse 57306 85 31.8 10 1334286 19 10.1 180454 20 1.4

'8105 Cobalt mattes& other products and articles of cobalt (incl waste&scrap 55611 9 42 2.7 674882 10 28.4 132328 13 5.4

'2603 Copper ores and concentrates 9819 71 15.2 0 20025531 22 35 64482 -48 0.1

'2602 Manganese ores and concentrates etc 8919 34 33.4 0 3190919 10 58.9 26732 34 0.5

'4407 Wood sawn/chipped lengthwise, sliced/peeled 4682 35 52.7 0 6824619 29 18.8 8876 18 0

'7103 Precious & semi-precious stone, not strug, 2488 60 3.6 7.3 3749893 86 33.3 68174 40 0.8

'7202 Ferro-alloys 2284 20.2 1.6 3352145 2 12.4 11295 53 0

'1404 Vegetable products, nes 842 8.6 7.6 154707 17 18.7 9765 47 1.5

'5203 Cotton, carded or combed 842 527 7.7 40 799 -7 0.4 10958 1297 3.4

'2605 Cobalt ores and concentrates 620 -61 81 0 331996 -17 61 765 -75 0.2

'7801 Unwrought lead 544 2.9 3 71961 -26 1.1 18838 98 0.3

Source: trademap-trade competiveness map

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