metadata: authors: 0: author: Colclough,Christopher
count: Zambia
docna: 0: docna: The labor market and economic stabilization
            in Zambia
docty: Policy Research Working Paper
subtopic: Primary Metals,Mining & Extractive Industry (Non-Energy),Labor Markets,Food Security,Transport Services
teratopic: Poverty Reduction
abstracts: cdata!: This report examines trends in the
            Zambian labor market over the period since independence. It
            focuses particularly on two phenomena - skill shortages and
            wage rigidities - which have made it more difficult for the
            economy to recover from the fall in price of its main export
            commodity : copper, in the mid 1970s. Real wages did fall
            somewhat over the following decade, but insufficiently so to
            promote economic diversification and recovery. The
            rigidities also help to explain the failure of more recent
            stabilization efforts, including the IMF program of 1985 - 1987.
geo_reg_key: 517195,517191
repnme: repnme: The labor market and economic stabilization
            in Zambia
display_title: The labor market and economic
            stabilization in Zambia
listing_relative_url: /research/1989/11/700410/labor-market-economic-stabilization-zambia
topicv3: Agriculture and Food Security m1326205 435,Transport m1326661 135,Mining Sector m1327113 554,Copper m1503516 2934,Jobs m1503931 2670
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Poverty Reduction
origu: Policy Plan & Prog Review Dept
no_of_pages: 45
author_keys: 0: author_key: 1131603
model_extractions: **Policy, Planning, and Researchi|**

**Macroeoonomic Adjustment and Growvlh**

This paper examines trends in the Zambian labor market over the period since independence. It focuses particularly on two phenomena - skill shortages and wage rigidities -- which have made it more difficult for the economy to recover from the fali in the price of its main export commodity, copper, in the mid-1970s.

Real wages did fall somewhat over the following decade, but insufficiently so to promote economic diversification and recovery. The rigidities also help to explain the failure of more recent stabilization efforts, including L IMF program of 1985-87.

TIhis paper is a product of the Macroeconomic Adjustment and Growth Division, Country Economics Departmcnt. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Raquel Luz, room NI l- 057, extension 61588 (40 pages with tables).

The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research g Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. !The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.

Produced at the PPR Dissemination Center
TABL! OF CONTENTS

||Page|
|---|---|
|Introduction|1|
|Economic Change in Zambia 1970-85|1|
|Aspects of Labour Supply|5|
|Aspects of Labour Demand|9|
|Labour<br>Market<br>Rigidities|11|
|Impact<br>of the<br>1985 IMPStabilization Package on the<br>Labor<br>Market|30|
|Conclusion|32|
|FOL<br>3tes|36|
|Appendix|37|
|References|39|
|Table 1|3|
|Table 2|6|
|Table 3|7|
|Table<br>4|10|
|Table<br>5|12|
|Table<br>6|13|
|Table<br>7|15|
|Table<br>8|17|
|Table<br>9|19|
|Table<br>10|20|
|Table 11|22|
|Table<br>12|24|
|Table<br>13|27|
|Table<br>14|28|
|Table<br>15|29|
|Appendix<br>Table<br>1|38|
# Introduction

Conventional stabilisation and adjustment policies for developing countries typically presuppose the existence of labour market flexibility. Variation in the nominal exchange rate is usually given a central place in such reforms because it can change the structure of relative prices in virtuous ways. In the presence of labour market rigidity, however, such price changes will not be achieved. If, for example, real wages were inflexible downwards, reduction of the nominal exchange rate would have scarcely any real effects: except during a short transitional period, relative prices would remain unchanged and resource reallocation would not occur.

Inflexibility of the labour market can also explain a lack of output response even where relative prices have been successfully altered. Low supply elasticities often arise from a lack of available physical inputs - raw - materials, equipment, intermediate goods but they can also be caused by shortages of or qualitative deficiencies in human resources, by ignorance of technological possibilities or of market opportunities. These facts are demonstrated in this paper, which examines the relationship between successive attempts to stabilise the economy of Zambia and trends in its domestic labour market. It is shown that both skill shortages and real wage rigidity exacerbated Zambia's economic decline over more than a decade, notwithstanding successive nominal devaluations of the Kwacha. Furthermore it is shown that the early demise, in 1987, of the adjustment package imposed by the IMP resulted from an unrealistic (or unconsidered) assumption that the majority of middle and lower income urban Zambians would tolerate pauperisation at the hands of a rapidly depreciating nominal exchange rate, notwithstanding the lessons and history of the previous decade. It follows that serious analysis of the labour market is a necessary input to (and the major past omission from) the design of stabilisation and adjustment programmes if they are to stand much chance of either economic or political success.

The analysis begins with a short account of Zambia's macroeconomic record since 1970. This is followed by an assessment of some of the main influences on and characteristics of labour supply and labour demand over the period. The central section of the paper identifies the major labour market rigidities in Zambia and their contribution to the country's economic decline. The final section examines the impact of the 1985 IMF stabilisation package on the labour market, and the reasons for its ultimate rejection. Conclusions - are drawn for future policy in Zambia, and for other countries contemplating or being urged to introduce - economic reforms.

# Economic Change in Zambia 1970-85

In recent times there have been few countries in the world which have had a more catastrophic economic record than Zambia. Over the two - decades ei,ding in 1985, only six countries from amongst the 120 or so for which data are available (World Bank 1987: Table 1) - had a worse record of income loss. Furthermore in four of these six cases (Niger, C-had, Uganda and F,icaragua) the occurrence of natural or political disasters in the form of lrought and/or war largely explain their demise. 'Easy' explanations are
-2-

absent in Zambia's case. Its recent economic history therefore has some important, and unusual phenomena to explain.

As argued elsewhere, the major causes of Zambia's economic decline lie in the interaction between the prolonged fall in export prices, and the particular ways in which the Zambian Government (GRZ) reacted to the payments deficits which this price trend caused (Colclough 1988). There were, nevertheless, aspects of the evolution of the labour-market in Zambia which prompted (or prevented the alleviation of) Zambia's difficulties. Table 1 summarises important aspects of recent economic change. During the early 19709 output growth was steady. But, at about 4 per cent per year, it was more modest than during the heady expansion of the immediate post-independence years. In 1975, howpver, growth was arrested. The first part of Table 1 shows the performance of each of the main branches of the economy over the period, expressed in 1970 constant prices. It can be seen that agriculture did continue to grow after 1975, but, at around 2 per cent per year, this was not as fast as population growth (see below). Thus, per capita agricultural production declined over the period. The picture in other sectors appears to have been even worse, with the output of mining, industry and services each remaining roughly unchanged, or falling slightly over the following decade.

The immediate reasons for this lie in the performance of the mining sector. These reasons are somewqhat hidden by the constant price production series for mining shown in the table. Since that is basically a volume index - - converting quantities to values on the basis of prices obtaining in 1970 it hides any value losses, or gains, accraing to Zambia over the period as a result of changes in the real international price of its main export commodity, copper. Such price changes have, in fact, been substantial. Most notably this was so in 1975, when the price of copper on the international market fell by almost 50 per cent. At that time the value of copper exports represented about half of Zambia's GDP, and over 90 per cent of exports in value terms. Tl is, the price fall had an immediate, and massive, effect upon Zambia's current income. Table 1 shows that the terms-of-trade loss in 1975 amounted to more than one quarter of GDP in comparison with prices obtaining in 1970. The whole of this loss arose from the collapse of the copper price.

The most immediate impact of these disastrous events was felt on the balance of payments. From a fairly comfortable position in 1974, both current and capital accounts swung sharply into deficit the following year. That on current account amounted to approximately 30 per cent of GDP. There were few alternatives to financing the deficit by Zambia increasing its iiaternational borrowing and by running down its reserves of foreign exchange. The latter were sufficient to cover only about 10 per cent of the deficit on current account. Accordingly there was heavy recourse to borrowing as a short-term response. This, of course, carried the implication of higher debt-service commitments over the longer term, which could be met only if the external earnings/expenditure imbalance were to be quickly corrected.
Table **1:** ActivitY Gross Doestic Product<sup>and Income (total and per capita), by Type of Acanomic</sup> (millions of constant<sup>1970Kwacha)</sup>

||1970|1974|1975|1980|1983|1984|1985|
|---|---|---|---|---|---|---|---|
|Agriculture|136.1|150.5|157.0<br>|166.4<br>|172.3<br>|181.9<br>|198.7<br>|
|Mining|460.3|474.3|427.9<br>|398.7<br>|446.5<br>|402.8<br>|381.4<br>|
|Industry|235.0|339.4|34r.0|326.8<br>|346.7<br>|349.7<br>|366.4<br>|
|<br>Other|437.1|509.7|508.2|525.9|506.9|500.8|513.0|
|GDP (market prices)|1268.5|1473.9|1438.1<br>|1417.8<br>|1472.4<br>|1435.2<br>|1459.5<br>|
|Plus T/T adjustment|(a)<sup>-</sup>|-104.7<br>|-387.2<br>|-367.3<br>|-427.1<br>|-350.0<br>|-360.0<br>|
|GDY(b)|1268.5|1369.2|1049.9|1050.5|1045.3|1085.2|1099.5|
|Population (000's)|4159|4700<br>|4846<br>|5647<br>|6285<br>|6500<br>|6725<br>|
|GDP per capita (K)|305|314<br>|297<br>|251<br>|200<br>|191<br>|190<br>|
|GDY per capita (K)|305|291|217|186|166|167|163|

**Notes:** aRough estimates for 1984<sup>and1985</sup> bGross domestic income:<sup>this is equal to GDP plus adjustment for variations in</sup> the terms of trade.

Tables 2.02 and 2.04<sup>and</sup> Sources: Calculated<sup>on the basis of data in World Bank1984,</sup> World Bank, 1986, Tables 2.02 and 2.04.
a 4 A range of policies were utilised by the Zambian Government in its atte=pts to achieve such a correction. Gross domestic expenditure fell by 18 per cent in 1976. Th's was necessary if more domestically produced goods were to be released for export, or, alternatively if imports were to fall. However, owing to the structure of the economy, export growth required substantial product diversification, rather than mere contraction of domestic dem'rd. Thus the main impact of the latter was felt on the side of imports which fell by one quarter, in real terms, in 1976. The composition of the expenditure reduction, however, gave additional cause for concern. Almost the entire brunt of the fall in spending -das concentrated on investment expenditure, whilst consumption continued to rise in absolute (though not in per capita) terms. This pattern was sustained during the following several years, which drastically reduced the possibility of a return to economic growth, even fromi the depressed levels of the mid 1970's.

Spending by the Government was also cut back sharply. Here again, however, the burden of the cuts was focussed upon the capital, rather than the recurrent budget. Capital spending fell by 70 per cent over the eight years ending in 1983. In spite of this the public sector deficit continued to amount to approximately one-third of total spending. This was partly financed by borrowing from the central bank, and partly by foreign borrowing, both of which tended to aggravate the size of the external payments deficit.

As regards policies focused directly upon the external sector, protection was sharpened by the introduction of an elaborate system of import licensing and of foreign exchange allocation. As has been found in many other country contexts, however, this system of controls was administered often inefficiently, and sometimes corruptly.It certainly served to reduce the level of expenditure on imports, but it did so in ways that further undermined the productivity of the domestic economy,owing to the shortages and delays which it helped to generate.

The exchange rate was gradually depreciated after 1975. By 1982 it had fallen to approximately two-thirds of its level in the mid-1970's. The pace of domestic inflation, however, was faster than in Zambia's main trading partners and, in spite of nominal adjustments, the currency in fact became increasingly overvalued. The prevailing price incentives, therefore, tended to decrease the profitability of export or import-substitute production over the period. Iu response to the high, and rising inflation rate, the Government increased the administrative regulation of consumer prices, and extended the range and extent of subsidies on basic commodities. Although this protected consumers, it further reduced the profitability of domestic industry.

The consequence of the above range of domestic policies wan that the economy continued to stagnate over the period 1976-1983. By the early 1980's, capacity utilisation in manufacturing had dropped to as little as 30 per cent, whilst transport and marketing bottlenecks prevented the effective distribution of those commodities that were available. Continued over-valuation of the exchange rate provided few incentives for diversification. Although imports were held back, the sustained decline of the copper price implied a continued reduction in real export revenues, and, therefore, in the capacity to import. The rising price of oil exacerbated the
difficulties. The real value of exports (adjusted for changep in import - prices) was halved between 1974 and 1975 but it was hdlved again by 1983. The impact of these trends is shown ir. Table 1: domestic income remained stagnant between 1975 and 1985, and by the latter year, income per head had fallen to a level which was scarcely mr.a than half that of 1970. Meanwhile, current account deficits continued, vh!ch were financed by borrowing. Both loans and attendant debt service grew sharply, and by 1983 the latter was equivalent to more than half of export earnings, exclusive of arrears equal to about two years of current debt service payments. An already disastrous situation thus became untenable. A major injection of external resources was needed, which would be forthcoming from the country's main donors only in return for a sharp change in the direction of domestic policy. Such changes were, in fact, introduced, following extensive negotiations with the IMF. The most fundamental of these came in late 1985. Their centrepiece was the introduction of a weekly auction of foreign exchange, which engendered a massive fall in the value of the Kwacha and a sharp readjustment to the whole structure of relative prices. Nevertheless, the reforms proved to be short-lived. A later section of this paper examines the reasons for this, together with the impact of these recent events upon the labour market.

# Aspects of Labour Supply

Population Growth and Age-Sex Composition: Against this gloomy background of economic decline there have been important changes in the characteristics of the labour force over the past two decades. The population had, by 1987, more than doubled since 1963. Table 2 provides estimates to 1980. It shows that its rate of growth has itself increased sharply over the period - from 2.5 per cent per year in the early years of independence, to 3.3 per cent over the period 1974-80. One of the major consequences of the acceleration in the rate of population growth is a change in its age structure. On the one hand it is becoming more youthful: the proportion of the population under 15 years increased from 46 to almost 50 per cent between 1969 and 1980 (Table 3), whilst the proportion in the working age group decreased. At the same time, because of declining mortality rates the proportion of elderly people increased over the period. Table 3 shows that - similar trends in the age structure have occurred for both sexes although if anything the decline in the proportion of males in the working age-group has been sharper than that for females.

These trends have had a number of important consequences. First, even if individual fertility declines, birth rates will remain high for a considerable number of years by consequence of the age structure. Second, the number of new entrants to the labour force will continue to increase sharply well into the next century. Third, the decline in the proportion of people ir. the working age-group implies an increase in the dependency ratio, with consequent needs for proportionately higher health and education expenditures, as well as heavier demands on the household budget, at a time when the economy has been in sharp decline. The interaction of these trends has undoubtedly resulted in extreme hardship being experienced by a large number of individuals and families.
0 Table 2: Pulation Growth and its Distribution, 1963-1980

||||||Average|Annual Gr|owth (%)|
|---|---|---|---|---|---|---|---|
||1963|1969|1974|1980|63-69|69-74|69-80|
|Total<br>Rural|2774484|2864879|3014000|3239389|0.5|1.0|1.1|
|Total Urban|715020|<br>1192116|1663000|2440419|8.9|6.9|6.7|
|of which- Lusaka<br>|123146<br>|<br>262425<br> <br>|<br>401000<br> <br>|538469<br>|13.4|8.9|6.8|
|Kitwe<br>|123027<br>|<br>199798<br>|<br>251000<br> <br>|314794<br>|8.4|4.6|4.2|
|Ndola|92691|159786|<br>229000|282439|9.5|7.4|5.3|
|Total Zambia|3490170|4056995|4677000|5679808|2.5|2.9|3.1|
|Percentage Urban(%)|20.5|29.4|35.6|43.0||||

Sources: Population Census Results from each of the years shown
7 Table 3: Poulation bY Sex and **Ace** Grou. 1969 and 1980 (tercentaaes)

|Age Group|M<br>1969|ale<br> <br>1980|Fe<br>1969|male<br>1980|To<br>1969|tal<br> <br>1980|
|---|---|---|---|---|---|---|
|Under 15 years|47.5|50.7|45.6|48.7|46.4|49.8|
|15-44 years|37.9|<br>36.3|42.9|40.0|40.5|38.3|
|45-64 years|12.1|<br>9.6|9.5|8.7|10.8|<br>9.1|
|65+ years|2.5|<br>3.3|2.0|2.6|2.3|2.8|

Source: GRZ 1980a, Table 2.3
- a -

Internal Migrationt The physical location of the population has also changed markedly. Analysis of the two most recent census results shows that rural-rural migration, primarily within provinces outside the line of rail, has been numerically the most important type of population movement. Nevertheless, rural-urban migration has remained very important - albeit with important shifts in volume over the years since independence. Urbaniqstion has been extremely rapid, such that by the mid 19808 Zambia was the most urbanised country in Sub-Saharan Africa (exluding South Africa), with almost half of the population living in urban areas by that time (World Bank 1987, Table 33). The movement to the towns was greatest in the early post-independence years. Table 2 shows that urban growth of 9 per cent per year in the 19608, slowed to about 7 per cent by the early 1970s. Further reductions in the annual rate of growth to around five per cent, appear to have occurred. Although the most recent disaggregated data are for 1980, ^ is probable that urban growth slowed sharply after that date as a result of the increased economic hardships associated with urban living. Data for the three largest towns are shown in Table 2. Their growth was particularly marked until 1974. Subsequently, the growth of the two copper-belt towns of Kitwe and Ndola fell beb id that of other urban centres. The capital city, Lusaka, however, continu*i to Srow rapidly, at least until 1980, - albeit at a somewhat slower pace than during t..e first independence decade. There has, therefore, been a redirection of migration away from the Copperbelt - which was initially worst hit by the recession of the late 19709 - towards the capital. Net-migration to the Copperbelt fell in relative terms by almost 50 per cent between 1969 and 1980, whilst that to Lusaka changed little over the period. Already by 1980 there wes evidence of increased return flows of migrants from the Copperbelt to Northern and Luapula provinces. Such out-migration from the urban areas most affected by economic decline will almost certainly have further increased over the past few years.

Schooling: The provision of schooling for Zambians has increased enormously since independence. Access at primary level has quadrupled, such that by 1984 more than 1.2 million children were in primary school. Secondary school places had increased ten-fold to 125000 by the same year, and university and technical college enrolments had increased likewise to approximately 10000 students. Even such rapid expansion of schooling as this, however, takes many years to change the educational profile of the population - significantly particularly in the context of Zambia's high rate of population growth. Thus, the population census of 1980 revealed that almost half of the population aged 15 years and above had not completed lower primary schooling, and were thus probably still illiterate. Moveover, only 10 per cent had had some post primary schooling, wi-ih tiny proportions having proceded to the tertiary level. These fact ,elp to explain the continued skill shortages which, as will be shown below, represent an important constraint upon Zambia's social and economic development.

Participation in the Labour Force: Somewhat unusually, the 1980 census defined the labour force to include all persons aged 12 years or more. They comprised 3.3 million persons. Of those, just over half (1.7 millions) were regarded as being economically active, with the remainder being students, housewives, retired or disabled persons, etc. Using these conventions, 71 per cent of the male labour force was recorded as being economically active, with
-9-

only 37 per cent of the females being so classified. For the usual reasons these estimates result in a significant understatement of the amount of productive work undertak % by women. Half of the working population were engaged in agricultural work (two-thirds of the females and about 44 per cent of the males). One third were self-employed and a further 5 per cent (but 12 per cent of the females) were unpaid family workers - again, preponderantly in the agricultural sector.

# Aspects of Labour Demand

Data on the number of employees in the formal sector are shown in Table 4. As is to be expected from what has been said earlier, experiences in the labour market bafore and after 1975 were very different. The first decade of independence was characterised by steady growth of formal employment at about 4 per cent per year, such that, by 1975, approximately 50 per cent more workers were employed than had been the case at independence. Subsequently, however, employment fell back, declining, on average, by about one per cent per year to 1984. This circumstance of absolute decline in formal employment over the decade beginning in 1975 is the most fundamental feature of ZaMbia's recent labour market history. Its effects have been momentous. The proportion of the labour force employed in the formal sector has fallen by one third since 1975. An even more startling implication is that whereas one in thirtieen Zambians had a job in the formal sector in 1975, ten years later only approximately one in 18 persons had such a job. Thus, the number of persons without access to any (direct or indirect) support from wage or salary incomes is now vastly greater than it was in the early 1970s.

The structure of formal employment by industry is indicated in Table 5. A number of important features emerge from this table. First, job losses after 1975 were heavily concentrated in the construction industry, which io3t more than half of its jobs by 1984. The primary cause of this concentration was the massive fall in investment expenditures, which resulted from the curtailment of domestic expenditures in response to the country's growing payments deficit. Second, employment also fell in mining and quarrying, particularly after 1980, in response to the sharply curtailed profitability of the copper industry. Thirdly, apart from agriculture, which stagnated over the period, employment elsewhere actually rose: in manufacturing and transport by about 10 per cent, and in services, by about 7 per cent to 1984 (but by somewhat more to 1980). More detailed analysis of the data for services reveals that the rise to 1980 was almost entirely due to expansion o. employment in the public sector, which could not be sustained, for fiziancial reasons, beyond that date. Nevertheless, it remains true that the most severe employment problems were contained in a rather narrow industrial range: outside mining and construction job losses were not so severe.

This Lonclusion is strengthened if one considers only Zambian employees. Rapid progress with localisation was achieved after 1975 - that is, an increasing number of Zambians took over jobs previously held by expatriates. Thus, whilst the total job losses between 1975 and 1984 amounted to about 30,000, almost 20,000 expatriate workers appeared to have been
10

**Table 4:** Emlovees in the Formal Sector<sup>by Citizenship, June 1964-1984 (a)</sup>

||Total Employees|Zambians|Non Zambians|Non Zambians<br>as % of Total|
|---|---|---|---|---|
|1964|264,100|232,000|32,100|12.2|
|1965|301,600|267,760|33,840|11.2|
|1966|313,360|284,480|28,880|9.2|
|1967|303,730|274,650|29,080|9.6|
|1968|319,730|290,8'J0|28,930|9.0|
|1969|321,460|291,640|29,820|9.3|
|1970|337,750|310,320|27,430|8.1|
|1971|358,350|331,670|26,680|7.4|
|1972|364,740|338,750|25,990|7.1|
|1973|377,640|342,990|34,650|9.2|
|1974|386,270|351,190|35,080|9.1|
|1975|398,840|365,330|33,510|8.4|
|1976|379,400|346,310|33,090|8.7|
|1977|372,630|345,320|27,310|7.3|
|1978|369,310|344,480|24,830|6.7|
|1979|371,670|348,290|23,380|6.3|
|1980|381,490|360,980|20,510|5.4|
|1981|373,720|355,220|18,500|5.0|
|1982|367,510|350,050|17,460|4.8|
|1983|363,800|348,270|25,530|4.3|
|1984|365,190|351,190|14,020|3.8|

Notes: Prior to 1972, data are available for Africans and non-Africans on:y. These are shown in the relevant citizenship columns. Data for 198;-84 are preliminary estimates.

Source: GRZ 1985, Table **6.**
- 11 -

localised over that period. Thus, Zambian employment fell by the somewhat lower figure of 10,000 workers over those nine years (Table 5).

The relationships between output and employment growth are investigated in more detail in Table 6. Employment/output elasticities are shown for the 1970-75 and 1970-80 periods. These estimates are rough, in the sense that they take no ar.count of changes in real and relative factor prices over the period. In addition, in a number of sectors the elasticities are not shown, owing to the occurrence of a negative value for one of the relevant variables. Nevertheless, for the economy as a whole the data suggest that the aggregate relationship between employment and output growth has been close to unit;. This implies that in the aggregate, no labour productivity growth occurred over the 19708. This unusual result can be explained in a number of ways. First the elasticities shown are heavil'y influenced by movements in the services sector, which itself is dominated by the public service. Since, here, output increases are basically determined by increases in the real wages and salaries paid, output and employment can usually be expected to move upwards or downwards at similar rates, in the absence of significant changes in the real value of average earnings. Second, circumstances of negative growth of output and employment are not conducive to the measurement of meaningful elasticities. For example, there are likely to be strong political and institutional reasons for laying off workers less quickly than may be thought justifiable on profitability grounds. Thus, the ensuing fall in average labour productivity will tend to raise the size of measured employment/output elasticities during times of recession. At the least, some adjustment lag is to be expected in the labour market, which partly explains the relationships between output and employment indicated by Table 6.

# Labour Market Rigidities

An important question which arises is whether or not conditions in the labour market exacerbated the economic decline. Although cause and effect are not easy to disentangle, it does seem that there were some structural characteristics prominent in Zambia which made adjustment to the new economic circumstances more, rather than less difficult to achieve.

Skill Shortages. The first of these concerns the skill-structure of the labour force. Shortages of skilled and educated workers have always comprised a major problem for the country's development. During the colonial period African education had not been given high priority. In spite of the comparative wealth of Northern Rhodesia, during most years far more money was spent upon the education of European children than upon all forms of education for the remaining 97 per cent of the population. In addition, racial discrimination in both the public service and the private sector was often explicit (for example, until 1959, legislation prevented Africans from being taken on as apprentices). Thus, the training and experience necessary for advancement was often not available to the African population. By consequence Zambia started out with a major deficit of professional and industrial skills, which was to prove very difficult to remove.

Table 7 indicates the changes in the educational structure of the formal sector Zambian labour force that have subsequently oc.urred. The
12 Table 5: Employees in the Formal Sector. 1965-84, by Citizenship and Economic Sectork<sup>81</sup>

||1965|1970|1975|1980|1984|
|---|---|---|---|---|---|
|Agriculture,Forestry,Fishing<br>|32700|<br>34610|<br>36100|32630|<br>35400|
|Zambian<br>|32070|<br>34090|<br>3479n|31580|<br>34660|
|Non-Zambian|630|520|1310|1050|<br>740|
|Mining and Quarrying|52360|<br>57640|<br>64750|63070|<br>58470|
|Zambian|44820|52130|<br>54440|57110|<br>54390|
|Non-Zambian|7540|5510|10310|5960|<br>4080|
|Manufacturing|27770|38160|44330|47760|<br>48200|
|Zambian|24030|35230|<br>41230|45860|<br>46720|
|Non-Zambian|3740|2930|3100|1900|<br>1480|
|Construction|45320|68740|71750|43750|<br>33610|
|Zambian|43100|66220|67790|42070|<br>32570|
|Non-Zambian|2220|2520|3960|1680|<br>1040|
|Transport & Communications|14560|<br>22340|<br>22050|23940|<br>24000|
|Zambian|11870|<br>19720|<br>20490|23040|<br>23340|
|Non-Zambian|2690|2620|1560|900|<br>660|
|Services(b)|88350|121480|154510|168150|165510|
|Zambian|72290|108200|142430|159780|159490|
|Non-Zambian|16060|<br>13280|<br>12080|8370|<br>6020|
|TOTAL|261060|342970|393490|379300|365190|
|Zambian|228180|315580|361170|359440|351170|
|Non-Zambian|32880|<br>27390|<br>32320|19860|<br>14020|

# Notes;

- a - Data are for fourth quarter of each year shown, except those for 1965, which are averages of all quarters, and for 1984, which are for June. Prior to 1975, the citizenship breakdown refers to Africans and non-Africans, rather than Zambian/nonZambian, respectively.

- b - Includes utilities, financial and business services, restaurants and hotels and other services.

- Sources: GRZ 1980b, and Meesook et al 1986: Appendix Table 1.
Table 6: Observed relationships between Outvut and Eloyment, by Sector. 1970-80

|||GDP(")||Average A<br>Growth of|nnual<br>GDP(%)|Average An<br>of Employ|nual Growth<br>ment(%)|Employme<br>Elastici|nt/Output<br>tiesla)|
|---|---|---|---|---|---|---|---|---|---|
||1970|1975|1980|1970-75|1970-80|1970-75|1970-80|1970-75|1970-80|
|Agriculture(h)|41.5|56.3|58.7|6.3|3.5|0.8|-0.5|0.12|-|
|Mining|460.3|427.9|<br>398.7|<br>-1.4|-1.4|2.4|0.9|-|-|
|Manufacturing|129.2|157.6|162.9|<br>4.1|2.3|3.0|2.3|0.73|1.0|
|Construction|90.3|138.5|<br>79.1|<br>8.9|-1.3|0.9|-4.4|0.10|-|
|Transport|48.8|57.6|<br>56.5|<br>3.4|1.5|'-0.3|0.7|-|0.47|
|Services '|403.8|499.5|<br>554.2|<br>4.3|3.2|4.9|3.3|1.14|1.03|
|TOTAL|1173.9|1337.4|1310.1|2.6|1.1|2.8|1.0|1.08|d.91|

Notes: a) Millions of Constant 1970 Kwacha, market prices

- b) Excluding subsistence output and employment

- c) Includes import duties less imputed bank service charges

- d) Calculated by dividing average annual growth of employment by that of GDP, for each period and sector

Sources: GDP data: CSO, Konthly Digest of Statistics, various issues Employment data: Text, Table 5
- 14 -

Hanpower Survey which was held shortly after independence (GRZ 1966), documented in some detail the extent of the manpower constraint faced by Zambia at that time. It can be seen from the Table that the vast majority of the 236,000 Africans then employed had had little or no formal schooling, and that less than one per cent of them had had five years of secondary schooling or more. Over the following two decades, however, the educational expansion initiated soon after taking office by Kaunda's United National Independence Party was to alter this educational profile sharply. Table 7 shows that by 1983 over 20 per cent of Zambian employees had at least 'O' level (secondary. Form 5) qualifications, and that about half had had some secondary schooling. These were major achievements for a country which, twenty years earlier, had inherited a school system which was so thoroughly inadequate in both quantitative and qualitative terms.

Nevertheless, this progress fell far short of meeting the needs of the formal sector for the full range of technical and professional skills, and a substantial number of non-citizen skilled workers had to be employed throughout the period. This was in spite of the fact that rapid localisation of the labour force was assigned high political priority soon after independence. A fairly complex set of regulations was established, requiring the satisfaction of strict criteria before work permits for expatriate personnel could be issued by the Ministry of Labour. Foremost amongst these was the production of satisfactory evidence by an employer that no suitably qualified or experienced Zambian was available for the job in question. Under these circumstances, a good indicator of the extent to which skill shortages amongst the Zambian labour force have remained important is provided by trends in the employment of non-citizens. Table 4 shows that the total number of non-Zambian employees remained approximately constant from 1964-76, although their proportional importance declined from 12 per cent to 9 per cent of formal employment over those years. Thereafter, however, the number of expatriate workers dro,pped sharply, such that by 1984 only 14,000 (less than half the earlie) levels) remained, accounting for less than 4 per cent of formal employment.

This aggregate picture of good progress with localisation is, however, misleading in a number of ways. First, in one important sense, the 'gap' is even smaller than it appears in Table 4, in that approximately half of the non-citizens currently employed are Zambian residents, mainly originating from other African countries, who, from a labour market viewpoint, can be treated as being equivalent to citizens since they are unlikely to face official pressures to leave.3 On the other hand, in a different sense, the progress with localisation has been less satisfactory than the table appears to indicate: although large numbers of non-citizens left Zambia after 1975, not all of those workers were replaced by adequately qualified and experienced Zambians. Many of their jobs remained vacant. This was particularly so for those expatriates who vacated professional and technical jobs after 1985 and who left the country primarily because they faced declining real incomes in the face of the Kwacha devaluations which occurred. By 1987, the situation in the health sector was particularly serious, with large numbers of foreign doctors having left Zambia, without replacement by either Zambian or expatriate personnel (see below). In addition, the aggregate quantitative picture hid qualitative problems in the labour market which affected most
1,

**Table** 7: Educational Qualifications held by Zambian Employees, 1965 and 1983 a)

|1|965|1|983|
|---|---|---|---|
|Number||Number|<br>%|
|Less than Form II<br>226681|<br>96.0|189514|<br>54.4|
|Forms II/III<br>7282|3.1|85123|24.4|
|;0' Level(b)<br>1516|<br>0.6|45308|13.0|
|A' Level(b)/Diploma 517|0.2|17566|<br>5.0|
|Degree<br>150|0.1|10759|<br>3.1|
|TOTAL<br>236146|<br>100.0|348270|<br>100.0|

- Note: a - Data for 1965 refer to Africans, rather than Zambians. Those for 1983 are based upon a sample survey of employees along the line of rail, covering approximately 70 per cent of total formal employment. The percentage distribution revealed by that survey has been applied to separate estimates for total Zambian employment, published by the CSO.

- b - '0' level and 'A' level are examinations typically taken after 5 years and 7 years of secondary schooling, respectively.

- Sources: GRZ 1966, Table II.3, GRZ 1983, Table 8.0, and GRZ 1985, Table 6.
- 16

sectors of the economys localisation had not always and everywhere been - efficiently handled. Thus it is evident particularly in the public and - parastatal sectors that key posts were sometimes filled by Zambians who had had insufficient training or experience. This problem became particularly - acute as regards deficiencies in management skills often at quite senior levels of the public service. Finally, those non-citizens who remained in employment were often concentrated in particular specialised or technical areas, requiring long periods of high-level training. Thus the process of localising the remaining jobs held by expatriates appears more problematic than has typically been the case in the past. Equally, the premature departure of such workers would generate problems that would be commensurately more difficult to solve.

Data on the characteristics of those in wage or salaried employment in Zambia tend to be unreliable, and inconsistent as between different sources. It is,. therefore, difficult to build up an accurate picture of the educational, sectoral and occupational composition of non-Zambian employment. Howeve- Table 8 shows the occupational breakdown of total employment as revealea by a recent manpower survey, which is of interest given the comparatively high coverage of the formal sector which it achieved.4 The table shows that, although non-citizens were, by 1983, a comparatively small - - proportion of total employment less than 5 per cent they were nevertheless proportionately much more important in professional and technical occupations, where they comprised 12 per cent of employment, and in administrative/managerial jobs where they accounted for more than one-fifth of total reported employment. It can be seen from Table 9, which shows all occupations with more than 130 non-Zambian workers, that some occupations in the professional group were still heavily dependent upon expatriate skills. The case of engineers is particularly startling, where more than 1000 expatriates were employed, comprising almost half of all such workers. Zambia also remained heavily dependent upon expatriate doctors. According to the survey, they comprised more than three-quarters of all doctors in the country (although this proportion is probably correct, the figures are significant under-estimates of the absolute number of doctors who were employed). Other occupations where at least one-quarter of all jobs were occupied by non-citizens include physical scientists, statisticians, accountants, university teachers, and managers. These data suggest, therefore, that there was in 1983 a significant training task ahead in order to localise all of these professional posts.

At first sight it may seem surprising that non-citizens still occupied a large number of jobs in the 'production, transport and related' occupational category: they comprised almost 4,200 workers, and accounted for one-third of all non-citizens employed (Table 8). Inspection of the more detailed tabulations from the survey reveals that, numerically, the largest single occupation in this category is miners (736 non-Zambian workers). Nevertheless, it can be seen from Table 9 that there were also substantial numbers of non-citizen production supervisors and foremen (597), machinery fitters and assemblers (435), electrical fitters (177), plumbers and welders (169), bricklayers and carpenters (259), transport equipment operators (425) and other labourers (741). Although the proportional importance of - non-citizens in these occupations is modest usually less than 5 per cent of
17

# **Table 8 SIile** of Emlovees **by** Maior **Occuvational Group and** Nationality, 1983

|Occ. Group|Zambian<br>(1)|Non-Zambian<br>(2)|Total<br>(3)|(2) as %<br>of (3)|
|---|---|---|---|---|
|Professional,<br>technical&<br>related|37,676|5,285|42,961|12.3|
|Admin.&<br>managerial|2,563|744|-<br>3,307|<br>22.5|
|Clerical|39,925|816|40,741|<br>2.0|
|Sales|4,583|321|4,904|<br>6.5|
|Service|35,580|752|36,332|<br>2.1|
|Agriculture,<br>Forestry, etc.|<br>16,021|527|16,548|<br>3.2|
|Production,<br>Transport<br>&<br>related|114,886|4,188|119,074|<br>3.5|
|Not stated|900|35|935|<br>3.7|
|Total|252,134|12,668.|264,802|<br>4.8|
|Estimated % of<br>Employment|total<br>72|82|73||

Sources: GRZ 1983; GRZ 1985.
- 18 -

total workers - these data do indicate that there remained a significant shortage of Zambian artisans in many of the highly skilled craft occupations, both in the mining sector and in other areas of the economy.

It should be recalled, however, that approximately one half of all non-citizen workers have long-term residence status, and are not 'targets' for localisation in the same way as are other non-citizen workers. The manpower survey indicated that ovar 4,000 of the 6,000 or so expatriates with work permits, as opposed to residence permits, were in the professiontl and technical occupational group. This proportion (70 per cent) compares with only 15 per cent of those with residence permits who fell into this occupational group (Table 10). This occupational concentration is also to be expected on the basis of the educational background of non-resident - expatriates 55 per cent of whom were reported to have university degrees, with a further 20 per cent possessing professional qualifications of various kinds. (GRZ 1983: Table 10.7). Thus, most of those non-Zambians shown in professional jobs in Table 9 were expatriates who could be localised as more qualified Zambians become available, whereas those with long-term resident status tended to work in the lower-level craft, primary teaching, clerical, farming and nursing occupations.

Thus, the recent sharp declines in the number and proportions of non-citizens employed are not so strongly indicative of an increased availability of Zambian skills as they might first appear. Considerable numbers of expatriates have left the country owing to the declining purchasing power of the Kwacha. Those who have left the public sector have often not - been replaced sometimes because of an inability to attract new staff, and sometimes because of a wish to focus the impact of expenditure cuts on non-citizen, rather than Zambian staff. One result has been a significant increase in the number of vacancies amongst professional and technical grades in all sectors of the economy. Unfortunately, comprehensive data on vacancies in the formal se tor are not available. The 1983 manpower survey did not collect such information, nor do the quarterly surveys of employment and earnings run by the CSO. Nevertheless, interviews with senior managers in all sectors of the economy during 1986 confirmed that an increase in vacancy rates was very widely experienced (UNDP 1986).

As for the public sector, more concrete information is available. The civil service grew fairly rapidly by, on average, almost 5 per cent per year over the eight years prior to 1983. Payroll costs accounted, during this period, for a growing proportion of public expenditures. In circumstances of increasing financial stringency, expendl.tures on supporting services, (such as transport and materials) were reduced to levels incompatible with efficiency. In 1984 the government, at the behest of the World Bank and the IMF and as part of the conditions associated with extending new loan facilities to Zambia, agreed to introduce a freeze on recruitment to the administrative cadre of the public service. Thus, a sharp increase in the vacancy rate occurred, and by 1985 it was estimated that some 10,000 of the 77,000 established posts in the civil service were vacant (UNDP 1986:155). In 1986 GRZ went further, in announcing its intention to make no new appointments to the public service without the special authority of the Cabinet Office, and to
19

**Table 9:** occupations in which Non-citizens are concentrated. 1983

|Occupation|Total<br>(1)|Zambian<br>(2)|Non-Zambian<br>(3)|<br>(3) as_4I_<br>of (1)|
|---|---|---|---|---|
|Physical Scientists|430|292|138|32.1|
|Architects and engineers|<br>2,476|1,381|1,095|44.2|
|Engineering technicians|3,222|2,874|348|10.8|
|<br>Doctors|334|73|261|78.1|
|Nurses and midwives|4,104|3,798|396|9.6|
|Statisticians and|||||
|related technicians|832|625|207|24.9|
|Accountants|3,531|2,716|815|23.1|
|University and other|||||
|Higher Ed. Teachers|1,472|1,081|391|26.6|
|Secondary Teachers|3,410|2,775|635|18.6|
|Primary Teachers|14,295|13,809|486|3.4|
|Managers|2,249|1,573|676|30.1|
|Stenographers|7,120|6,921|199|2.8|
|Book-keepers|7,278|7,160|188|2.6|
|General clerks|15,669|15,430|239|1.5|
|Cooks|4,602|4,438|164|3.6|
|Protective service|||||
|workers|18,362|18,083|279|1.5|
|Farm managers|1,493|1,345|148|9.9|
|Agricultural workers|13,348|13,030|318|2.4|
|Production supervisors/|||||
|<br>foremen|8,215|7,618|597|7.3|
|Miners|15,054|14,318|736|4.9|
|Machinery fitters|11,345|10,910|435|3.8|
|<br>Electrical fitters|<br>4,587|<br>4,410|177|3.9|
|Plumbers, welders|5,841|5,672|169|2.9|
|Bricklayers, carpenters|9,270|9,011|259|2.8|
|Material handlers|6,790|6,650|140|2.1|
|Transport operators|9,846|9,421|425|4.3|
|Other labourers|29,410|28,669|741|2.5|
|sub-total|204,585|193,923|10,662|5.2|
|Other workers|||||
|included in survey|60,043|58,039|2,004|3.3|
|Total in Survey|264,628|251,962|12,666|4.8|

Source: Calculated from GRZ 1983, Appendix 1.
20

**Table 10: Non-Zambian Employees, bY type of Permit and Maior Occupation Group. 1983**

||Work<br>Permit|Residence<br>Permit|<br>Entry<br>Permit|Not<br>Stated|Total|
|---|---|---|---|---|---|
|Professional,<br>Technical<br>land Related|4,263|944|23|48|5,285|
|IAdministrative<br>and<br>Managerial|364|362|6|12|744|
|,Clerical|127|678|1|9|816|
|Sales|116|20;|1|-|321|
|Service|140|580|5|28|752|
|Agricultural|165|358|2|2|527|
|Production, Transport<br>& Related|840|3,000|100|249|4,189|
|Not Stated|11|22|-|1|34|
|Total in Survey|6,033|6,149|138|349|12,668|

Source: GRZ 1983, Table 10.0.
- 21 -

cut the daily paid employee work force by 40 per cent (about 20,000 jobs) over a two year period.

Data are not yet available with which to review the detailed impact of these measures. Nevertheless, various sources report that they have tended to further undermine the effectiveness of the public service, rather than to improve its efficiency. The problem is that retirement, or contract expiry, does not necessarily occur in a way which reflects manpower priorities. An unstructured approach to reducing public sector staffing via 'natural wastage' may therefore compound the problems of production and service delivery.

An example can be given from the Ministry of Health, which, in 1985 undertook a review of medical manpower. High and unevenly distributed vacancy rates for nurses and technicians were causing major difficulties for the provision of health care, particularly away from urban centres. The situation amongst doctors, however, was particularly critical. Table 11 shows how the staffing position developed between 1981 and 1985. It can be seen that although there was a net reduction of 86 expatriate doctors over those years, they were 'replaced' .y an increase of only 41 Zambian doctors. Thus, the vacancy rate rose from 20 to 30 per cent over the period, after allowing for increases in the number of posts in the establishment. Again the shortages - varied widely in different parts of the country with vacancies reaching almost 60 per cent at Ndola hospital on the copperbelt. As it happens, these vacancies were caused more by the deterioration in the value of local salaries paid to doctors than by the freeze. But they are illustrative of the potentially misleading import of aggregate data on localisation 'progress' over the past decade. The shortage of skills remains an important rigidity in the Zambian economy - increasing the costs of economic restructuring, and reducing both its speed and potency.

Earnings and Labour Costs. The issue of wages and incomes policy and performance in Zambia has received considerable academic attention in the past, with notable contributions from Knight 1971, Dan.el 1979, Pry 1979 and Meesook et al 1986. These generally showed that the wc-cders in the copper industry had acted as wage leaders for those in other s,^ctors, and that the strength of their organisation, combined with the goverr.mint's willingness to accede to their demands in the early years after indepetdence, had established Zambia as a high wage economy from an early stage. There was lively debate as to the extent to which wage increases presented a 'problem' for the country's development. Jolly and Williams (1971) showed that about half of the increase in the cost of living over the late 19609 could be statistically attributed to increased wage costs. In a period where the economy received increasing windfall gains from the rise in copper prices, such increases in average - earnings could be accommodated even though the competitiveness of industry outside copper was badly affected. There was, therefore, a certain complacency about these trends expressed at the time, and even by more recent commentators (eg Fry 1979a 84-85). Whatever view one took of that early period, by the time of the copper price fall in 1975, the Zambian economy was in no way able to restructure production easily away from copper, into manufacturing or service production. Its wages in the non-agricultural sector had by this time become considerably higher than in most countries of a similar size, structure and income level. This is demonstrated by the
22

**Table 11: Staffing Levels of Doctors. 1981-85**

|Year|Establishment|Zambian|Non-Zambian|Vacancies|Vacancy<br>Rate %|
|---|---|---|---|---|---|
|1981|808|62|577|169|21|
|1982|808|79|586|143|18|
|1983|830|92|584|154|19|
|1984|830|88|531|211|25|
|1985|850|103|491|256|30|

Source: Ministry of Health, Manpower Development Office
- 23 -

analysis shown in the Appendix. Data are available for 19 countries which allow a comparison of monthly wage-earnings and per capita incomes. For these purposes the year 1976 has been selected in order to illustrate the relative position of Zambian wage-earners one year after the fall in the copper price. It should be noted that Zambia is not selectively disadvantaged by the particular year chosen for this comparison, since the real average earnings of Zambian employees remained approximately constant between 1975 and 1980 (Table 12). As explained in the Appendix, there are methodological and statistical problems which affect this kind of comparison. Nevertheless, some important contrasts emerge.

Zambia is shown to be a high-wage economy. This can be demonstrated in a number of different ways. First, and most obvious, is the question of the absolute value of wages paid in Zambia in comparison with other countries. The Appendix Table shows that average monthly earnings from wages outside agriculture were generally, in 1976, two-to-three times the US dollar value of any of the other six sub-Saharan African countries included in the comparison. Although Zambian wage-earnings were roughly similar to those in Papua New Guinea, Cuba and Costa Rica, the only country where earnings (converted to US - dollars) were significantly higher was Venezuela much richer than Zambia, and with by far the highest per capita income of any country in the sample.

The results are similar for agricultural wages. Of the eleven countries for which comparable data are available, only two (Korea and Cuba) appear to have paid higher agricultural wages than Zambia in 1976. The latter were about 20 per cent more than the average for all countries having the relevant data (compared with a 33 per cent differential for non-agricultural wages).

As for the ratio between agricultural and non-agricultural wages Zambia appears not to have been unusual. Its wage ratio at 2.62 is fairly close to the mean value (2.49) for all countries shown in column 9 of the Appendix Table. Furthermore, Zambia shares the median ranking with Costa Rica. It is not, therefore, the relative levels of rural and urban wages which have distinguished Zambia from elsewhere, but, rather, the absolute level of wages paid, in all sectors, in comparison with other similar countries.

A further way to analyse the earnings data is to compare them with levels of per capita income. This is done in column 8 where the ratios of earnings outside agriculture to per capita incomes are shown. Once again, Zambia emerges well up in the rankings. Only Burundi and Kenya have higher ratios than Zambia. Both of these countries are considerably less well off than Zambia, and, at least in Burundi's case, the outcome is more influenced by the low value for the denominator (per capita income) than by the numerator (earnings) being high. Finally, it is worth noting that all of the countries which were poorer than Zambia in 1976 had a wage structure which was also - absolutely lower mostly by a considerable margin. For the nine countries in this category, the value of non-agricultural earnings in seven of them were half, or less, those in Zambia. Agricultural sector differentials were less dramatic, but remained sharp.
24

# **Table 12** Average Annual Real Earnings of **Employees by** Sector 1965-83 **(1975** Kwacha)(a

||1965|1970|1975|1980|1983|
|---|---|---|---|---|---|
|Agriculture, Forestry, Fishing<br>||||||
|Zambian<br>|327<br>|492<br>|453<br>|518|393|
|Non-Zambian|4410|6350|2524|2902|1215|
|Mining and Quarrying<br>||||||
|Zambian<br>|1570<br>|2179|1478|1668|1186|
|Non-Zambian|10034|10254|6784|5278|3604|
|Manufacturing<br>||||||
|Zambian<br>|924<br>|1133<br>|1179|1063|756|
|Non-Zambian|5836|7590|5657|5243|2972|
|Construction<br>||||||
|Zambian<br>|612<br>|860<br>|764|805|632|
|Non-Zambian|6549|9694|6868|3847|2850|
|Transport<br>||||||
|Zambian<br>|924|1710|1834|1308|1006|
|Non-Zambian|5743|6651|7377|5182|2662|
|Services(b)<br>||||||
|Zambian<br>|869|1119|1246|1146|884|
|Non-Zambian|5149|5535|4894|4278|2726|
|Total<br>||||||
|Zaambian<br>|890|1210|1140|1134|851|
|Non-Zambian|6476|7207|5572|4601|2897|

Notes: a - generally 4th quarter figures. Nominal earnings estimates for Zambians deflated by low-income CPI. Those for non-Zambians are deflated by the highincome CPI.

b - includes utilities, trade, hotels, finance and other services.

Source: Meesook et al, 1986: Appendix Table 3
- 25 -

These results are important from the standpoint of international competitiveness. They do not, of course, decisively indicate the existence of differences in labour costs. Such judgements would reguire additional information upon the productivity of labour amongst the countries in the sample. Nevertheless the differences which have been revealed are sharp enough to require implausibly high productivity lev-els in Zambia relative to other similar countries, if such labour cost differences in the mid 19708 were not to have held. There can be little doubt, then, that the level of wages (and labour costs) were higher than would be easily compatible with Zambia rapidly increasing her export revenues in manufacturing and other 'non-traditional' sectors in order to fill the gap created by lost earnings from copper exports. A reduction in wages would by no means have been sufficient to achieve such diversification, but it is clear from the above comparisons that such a change would have been a necessary component of any serious attempt to respond to the country's changed trading circumstances.

The movement of average earnings in real terms for the first two decades of independence is shown, in constant 1975 prices, in Table 12. Average earnings peaked in 1970. But the fall to 1975 was primarily caused by the decline in average earnings.in the copper industry. Wage increases during the 1970s in the mining sector were less than the rate of inflation, and represented a period of consolidation after the very large increases in earnings granted to mineworkers resulting from the Brown Commission in :966. In most other sectors average earnings continued to rise until 1975, particularly in services which - at least as defined in Table 12 - covered a large proportion of total formal employment. By this time, therefore, the mining sector was no longer exerting successful wage leadership over the rest of the economy.5 The picture appeared to change, however, over the following years. By 1983 the average earnings of Zambian employees had fallen to three-quarters of their 1975 level, with sharper declines being experienced by workers in manufacturing, transport and services. These declines in real earnings came from a number of sources, including changes in the structure of the employed labour force, changes in the earnings structure, and movements in nominal earnings which less than fully compensated for inflation. It is not possible, on the basis of available data, to dissentangle the relative importance of each of these variables to the net results summarised in Table 12. It is clear, however, that government policy towards wages and salaries had a more profound effect upon the earnings structure - particularly after 1980 - than had been the case earlier on. This occurred in a number of ways.

First, the main instrument which had led to the relative protection - of real wages in Zambia had been the exchange rate which had appreciated slightly over the early 1970s. Since most consumption goods are imported, exchange appreciation reduces, ceteris paribus, the Kwacha cost-of-living. Following the devaluation in 1976, however, the value of the currency continued to move downwards. This gathered pace from 1980 onwards, and by 1983 the Kwacha had been reduced to about half of its value in 1975. It can be seen from Table 13 that the impact upon domestic inflation was substantial, with the rate doubling to 20 per cent per year between 1975 and 1983. These
- 26 -

were circumstances in which it was easier to achieve reductions in the real wage and salary bill in all sectors of the economy.

Second, although the income decline was suffered by workers throughout the formal sector, the earnings losses were felt particularly strongly by those in the public sector. Between 1975 and 1980, for example, workers in the public sector experienced a 16 per cent decline in real earnings, yet those in the parastatals suffered only a one per cent loss, whilst Zambian employees in the private sector were, on average, 14 per cent better off over the period.6 After 1980, on the other hand, the real earnings of workers in all sectors fell as inflation gathered pace (Tables 12 and 13). Survey data are not yet available to allow discussion of trends in average earnings beyond 1983. Yet it was in later years that the major changes in macroeconomic policies occurred. Although these changes were introduced primarily to deal with the economy's structural disequilibrium on the balance of payments, they had sharp implications for the distribution of incomes in Zambia, and for trends in real earnings from formal sector employment. Again, public sector workers were affected most, although earnings in all sectors were severely reauced.

This is illustrated by Table 14 which shows the development of the government's general administrative salary scale (covering all sections of the service) since 1967. The nominal salaries payable have been converted, in Table 15, into real terms, and are expressed as ratios of real salaries in 1975. A number of conclusions can be drawn from this table. First, the government has consistently narrowed the gap between the highest and lowest salaries in the administration over the past twenty years. Top salaries declined sharply in real terms to 1975, whilst the lowest paid employees continued to enjoy real earnings increases until that date. Subsequently, although the real earnings of all government employees declined, the fall was much sharper and faster for the senior officers than for those in junior positions. By 1982 the better paid had lost between 40 and 50 per cent of their 1975 real earnings, whereas earlier losses were made good somewhat for the lowest paid, such that in 1983 they were still only 10 per cent worse off than in the mid-70s. These trends continued between 1983 and 1985, with the real incomes of all except the very lowest paid dropping to well below one-third of their 1975 level.

In October 1985 the government implemented a salaries revision. For the administrative grades of the service the increases were in two stages - the first payable in October 1985, and the second instalment payable in June the following year. It can be seen from Table 15 that this review continued the earlier policy of narrowing the income gaps in the salary structure. Nevertheless, even after implementation of the first part of the review, most grades received less than one third the real value of their 1975 earnings. The junior clerical and unskilled groups fared better, but their earnings fell to less than three-quarters of their 1975 level. Moreover, these changes coincided with the introduction of the weekly foreign exchange auction and a resulting 70 per cent devaluation of the Kwacha (see Table 13). During 1986 prices rose by more than 50 per cent above their levels of the preceding year, primarily as a result of the massive increase in import prices engendered by devaluation. By consequence, the additional nominal salary increases that
27 TABLE !3: Average Annual Kwacha/Dpllar Exchanqe Rates and Inflation: Selected Years

||US$per Kwacha|Urban<br> <br>Low Inc|CPI<br>High Inc|Annual % c<br> <br>Low Inc|hange in CPI<br>High Inc|
|---|---|---|---|---|---|
|1970|1.40|||||
|1975|1.55|100.0|100.0|10.1|8.5|
|1980|1~27|202.9|189.4|11.7|11.9|
|1981|1.15|231.3|209.1|14.0|10.4|
|1982|1.08|260.2|236.7|12.5|13.2|
|1983|0.80|311.2|278.6|19.6|17.7|
|1984|0.56|373.5|336.8|20.0|20.9|
|1985|0.37|513.5|446.6|37.5|32.8|
|1986 July-Sept|0 <sup>.</sup>1 6<sup>(a)</sup>|778.4|707.2|51.6|58.4|
|1987 April(b)<br>**May**|0.0 5(a)<br>0.125(a)|938.3|921.6|37.4|52.4|

Notes: (a) From October 1985 onwards the value of the Kwacha was determined at a weekly auction of foreign exchange. Wide fluctuations took place during 1986. The value shown is the average value obtaining in the months July-September. Further deterioration took place. The lowest value reached is that shown for April 1987. As from May 1987 the auction was suspended, and the Kwacha's value was pegged at US$0.125.

- (b) CPI figures for 1987 are for the month of January. Inflation rate for 1987 calculated by comparing these data with January 1986 CPI, as reported by CSO.

Sources: World Bank 1986, Bank of Zambia, and GRZ 1987.
# 1: GwmiU Aitiattiv g:le: 1967-0614g

|Scale|<br>post|am.67|mne71|July 75|Jan 79|Jan.80|Jan. 82|Jan. 83|_Nov._83|Oct. 85|July 86|
|---|---|---|---|---|---|---|---|---|---|---|---|
|33|iamr-Sscretsry|6.250|7.600|7,812|7.914|10.176|10,176|10.176|10,176|11,536|12,216|
|87<br>|Assistant Director|5,120|5,800|6.324|6,468|7.440|7,40|7,440|7,440|8,680|9.300|
||U12<br>Oniv. Grad.(gntzfl(b)|<sup>2.184</sup>|2,340|2,976|3,132|3.852|3,870|3,876|3.992|4.931<br>|5,400<br>|
|S13|Diploa<br>Intry|1.72S|1,860|2,388|2,544|3.264|3,300|33,336|3,465|4,283<br>|4.692|
|Sal|Lmst<br>FPid_Salaried_<br>bvior|312|396|540|696|984|1.164|1,324|1,470|2.:46|2,464|
||Unskilled<br>non-established|**n.G.**|342|480|636|840|1,056|1,236|1.382|2.060|2,400|

:

**(a)** lb dates abn represent dates of lplentation for all salaries coiasboas fra 1967 arwards.

(b) k entry **polnt** mm moved upwardr<sup>In 1979. Salaries aomnbefore that datewere not entry points,butwro theequivalent</sup> polint co the scale to tUe _shwam_ for later years.

": Ibr scace prior to Octobr 1965, **see**<sup>Neeook</sup><sup>**at**</sup> .1, 1986, Table A.l.3: 76. For October 1905 and<sup>Jam 1986, see GRZ1906s.</sup>
olaJ 1S: l.ndle cf rdl eMlrl. In the Public Sector: Ganral Mdai.trative Scale 11975 - 100)

|**Scale**|<br>**Poet**|Jan.67|hNy71|July 75|Jan 79|Aug. 80|Jan. 82|Jan. 83|'Mv. 83|Oct. 85|July 86|
|---|---|---|---|---|---|---|---|---|---|---|---|
|53|Under-Secretar'|135|132|100|60|60|59|5i|45|29|22|
|S7|£,iatant<br>Director|137|124|100|60|62|53|46|41|27|21|
|S12|**Univ. Grad.**(batry)|121|106|100|58|63|53|46|41|29|23|
|S13|Dipim<br>Entry|119|IOS|100|59|67|57|S0|44|31|25|
|'21|lowest Pa148binned<br>rlo.es|95|99|100|71|89|89|87|83|70|58|
||Unulled<br>aon-<br>eatabliahed|**n.m.**|96|100|73|85|90|91|88|75|63|

o ss eG 1916b. Table 1.9.. and text, table 14.
- 30 -

were introduced in June 1986 had already been completely eroded by inflation prior to their implementation. Even after their receipt, employees were worse off than in October 1985 by between 15 and 24 per cent at the bottom and top of the service, respectively (Table 15). Thus, the cuts in real earnings incurred in 1985/6 were sharper, for most workers, than the real earnings loss which they had incurred during the previous decade. This was dramatically so for unskilled wage employees. It seemed then that the sharp decline in the exchange rate following from the auction would sharply reduce wage costs throughout the whole range of skills. But these changes proved to be short-lived, and their early success did not imply that a new era of wage flexibility had arrived.

# Impact of the 1985 IMF stabilisation package on the Labour Market

The decade ending in 1985 had been difficult for many Zambians. Job prospects for school-leavers had deteriorated and unemployment in the urban centres had increased. By consequence those years witnessed a significant increase in the proportion of the population dependent upon informal and subsistence agricultural production. Yet here, too, incomes remained depressed, as earlier sections have indicated. Agricultural production per capita stagnated, or declined, between 1970 and 1985 - even in the face of a potentially highly fertile and productive physical environment, with much lower ratios of population to cultivable land than in countries like Kenya, Tanzania and Malawi. The rural areas were thus unable to provide an easy alternative for those increasingly excluded from participation in formal sector work.

The package of policy reforms introduced at the behest of the IMF in 1985 initially appeared to offer promise of a solution to some of Zambia's most urgent structural problems. Under these reforms, interest rates were de-controlled (and reached 30 per cent for some borrowers); a foreign exchange auction was introduced, accompanied by the abandonment of import licensing; agricultural producer prices were substantially raised and the monopoly of agricultural marketing enjoyed by the National Agricultural Marketing Board was ended. These reforms were welcomed by the aid community, and were marked by the signing of a two-year Stand-By Arrangement with the IMF, and by agreements to reschedule $500mn of debts owed to the 'Paris Club' group of official creditors.

The direct impact of these measures upon wage rates has been indicated above: earnings were sharply reduced at all levels; but, for the first time since the onset of Zambia's economic problems in 1975, the real value of unskilled and minimum wages were sharply reduced. These changes directly and quickly reduced real wage costs ii the formal sector, having an immediate impact upon the economy's productivLty and competitiveness, at least in foreign exchange terms. Equally the higher prices obtainable by producers of 'tradeable' goods changed internal relative prices sharply in favour of agriculture, manufacturing and copper production, and away from services and the production of other 'non-tradeables'.

Yet, at the same time, the increased opportunities presented by the reforms were also associated with sharply increased costs for some members of
- 31 -

the population. Wage and salary e&rners were obviously the most directly hit. But other groups were also affected. Unemployment was initially worsened by reductions in public spending, by the imposition of the freeze on recruitment to established posts, and by reductions in the 'daily paid' public sector labour force. Workers in the informal sector suffered in at least two ways: first, they faced reductions in the demand for the goods and services which they produce, owing to the declining wage incomes received by the formally employed. Second, the sharp reductions in formal sector incomes forced many - with jobs to engage in 'moonlighting' thereby swelling the numbers participating in informal urban activities, and forcing a reduction in the average incomes earned from these activities. Equally, those wh,o were - dependent on government services particularly education, health and extension - experienced a decline in their real incomes resulting from expenditure cuts. These costs particularly affected those with large families, single parent households, the old, the sick and the infirm.

This downward pressure upon other incomes which the reductions in public spending, increasing levels of unemployment and declining real wages set in train, had wide implications. A sample survey undertaken early in 1986 amongst 100 low-income Lugaka households showed that the majority had significantly changed th, composition of their diets since the auctioning of foreign exchange had began in October 1985. In particular, the quantity of more expensive, high protein foods which had previously been bought had been reduced, and often substituted by mealie meal. Some of the very poorest households in the sample, however, had also reduced their purchases of staples. Within the group, female-headed households were shown to be most at risk, since they were often dependent upon a single, irregular income source (UNDP 1986:22).

More generally, incomes in the informal sector were threatened during the initial period of policy reform, largely because of the sharply declining incomes of the wage-earners, on whom they depended for their market. This, together with rising levels of urban unemployment implied that the incidence of serious hardship within the urban centres increased significantly over the short-term. As regards poorer families in the country as a whole the short-term impact of adjustment was also probably negative. For rural producers the re-structuring of relative prices should have been relatively - advantageous except for that important group of food producers in isolated communities, where the previous policy of panterritorial pricing had provided a cross-subsidy from those closer to the line of rail. Equally vulnerable were poorer households with large families. For them the previous decade had been characterised by falling standards of educational provision, medical care and nutrition. Now, further reductions in government health and education budgets in many parts of the country (including the urban areas) selectively disadvantaged those households which - on account of family size - had the lowest per capita incomes. Equally, of course, they hit the prospects for long-term economic growth by undermining the quality and effectiveness of the nation's future human capital.

Reiection of Reform. During 1986 the exchange rate had fluctuated between **KS** and K14.6 per US dollar, (compared with a rate of K2.2 which had prevailed prior to October 1985). The inflation rate generated by the
- 32 -

floating of the Kwacisa (Table 13), and the impact this had upon domestic incomes, discussed above, caused GRZ increasing concern. Extensive rioting broke out in the Copperbelt towns in December 1986, following an attempted doubling of the price of maize-meal by the government, as part of its commitment to the IMF to remove consumer subsidies. These and other indications of dissent resulted in a series of reversals of economic policy. At the end of January 1987, the price of the Kwacha was pegged in a range of - K9 to K12.50 per US$ the actual price to be determined by weekly auction bids. This was followed by further modifications to the system notablv, in March, by the announcement of a two-tier exchange rate system, only part of which was to be determined by the market.

The difficulties, however, continued. The auction-determined rate for the Kwacha continued to fall sharply; strikes and outspoken criticism or - government policies increased. At the beginning of May by which time the - Kwache had fallen to K21 per US$ President Kaunda suspended negotiations with the IMf. Ha discontinued the auction and imposed a new fixed rate of K8 per USS. Debt service payments were to be limited to 10 per cent of export eanaings, net of the import requirements for the mining sector, the airways, and of fuel and fertiliser. Interest rates were cut by 5 per cent, and price control was resurrected. Foreign exchange licensing was also to be introduced once again.

These changes represented a complete abandonment of the policy reform programme, and a return to the earlier regime. They were a consequence of the speed and intensity with which the IMF programme had been applied. Large sections of the labour force had been impoverished by the stabilisation - package including those sections of the community upon which the government continued to depend for support. Although the revisionist stance could hardly have made the country's foreign exchange position worse, it was Zambia's long-term prospects for diversification and growth which were probably most affected by tnese events.

# Conclusion.

This paper has examined conditions in the Zambian labour market during just over a decade of economic decline. The causes of the sharp falls in income which occurred in 1975 were external; the result of extreme export and income dependence upon the production of one commodity - copper - the price of which was halved in 1975, and which did not recover until 1988/89. The reasons why the Zambian economy then stagnated for more than a decade were, however, primarily internal (with the important exception of the further deterioration in terms of trade caused by the second oil crisis in 1978/9). This paper has argued that two particular 'rigidities' in the labour market made important contributions to this lack of economic response.

The first of these 'rigidities' was the persistence of high level skill-shortages throughout the formal sector. These have acted as a constraint on growth and diversification in a number of ways. First they have increased costs of production. Although production bottlenecks were partly avoided by recruitment of expatriates, the unit costs of such workers have been typically a large multiple of the local earnings associated with the
# - 33 -

job in question. Thus the shortage of Zambian skills, and the associated high dependence upon non-citizen personnel has made the costs of industrial expansion and growth greater than they would otherwise have been. Second, during the years after 1975, there is evidence that the wish by the GRZ to make faster progress with localisation, the increasing difficulties of living in Zambia for foreigners, and, in later years, the reduced real value of benefits on offer, led to a faster reduction in expatriate employment than was desirables vacancy rates in skilled jobs rose, and the replacement of expatriates by insufficiently skilled/expertenced Zambians became more frequent. There are other costs associated with dependence upon non-citizen skilled workers which economic analysis often overlooks. Cultural and attitudinal differences can often hamper relationships at the workplace. Expatriate entrepreneurs may be more interested in short-run profit maximisation than in longer-run accumulation and output growth. The process of innovation, and of providing risk capital for new ventures is probably different if the relevant skills, experience and capital are mainly in non-citizen hands. Under these circumstances, labour productivity was held back and opportunities to expand production, where they existed, could often not be exploited.

Wage rigidity was the second - and probably more important - feature of the labour market which contributed strongly to the years of stagnation. The paper has shown, using a number of different indicators, that in the mid 1970s real wages in Zambia were very high in comparison with other countries. In spite of increased production difficulties and rapidly rising unemployment, the paper has also shown that real wages were maintained, on average, to 1980, and then fell modestly to 1983 (although with sharp differences between sectors). In these circumstances the possibility of expanding the production of tradeable goods was sharply constrained by Zambia's lack of international competitiveness. Although other factors were also unfavourable, high wage costs were an important source of Zambia's difficulties at this time.

It is important to understand why these features can properly be described as 'rigidities' in the labour market. This is so in the sense that they constituted barriers to production which were not removed - or even significantly reduced - by the operation of the market mechanism. Market signals thus proved inadequate to the task of securing the resource reallocation necessary to stimulate production. In the case of the skill shortages, the rigidity proved unresponsive even in the face of high personal returns to investment in post-secondary education and training, and high costs of expatriate recruitment. It was not, then, a matter of incorrect market - signals but of inadequate response. Nor did this response appear to be constrained by state policy. The shortage has not been so much a function of too few student places in post-secondary education and training, as of a shortage of adequately qualified or motivated students emerging from the schools. In short it appears that the intractability of the skill shortage - is only partly caused by state policy it is equally strongly related to matters of social and economic history, of custom and culture and of a lack of industrial and job-related experience. These factors probably have as much importance in explaining th- general aconomic demise of sub-Saharan Africa as
- 34 -

they do in the Zambian case. Much more analysis of them is needed in this. and other country contexts.

In the case of wages, we are dealing with the rigidity of<sup>an</sup> economic signal - an even clearer case of market failure.<sup>Wage levels were</sup> maintained in spite of a sharp rise in open unemployment in the<sup>urban centres</sup> and a decline in the profitability of large sections of industry. This was partly a reflection of the power of labour vis--vis the employers - a historical legacy from the 19609 when the copper industry unions demonstrated to the rest of Zambian labour the benefits to be gained<sup>from organisation.</sup> Yet it was perhaps more strongly a product of government policy<sup>throughout the</sup> - period and therefore a rigidity promoted (or permitted)<sup>by State action</sup> rather than by structural or historical circumstance.

The key issue here was the government's use of the exchange rate instrument. Although a series of nominal devaluations did occur after 1975, these were rarely sufficient to compensate for the differential in the inflation rate between Zambia and her main trading partners.<sup>The effects of</sup> this were on the one hand to preserve the purchasing power<sup>of wages and</sup> salaries, and on the other to do little to increase the incentives<sup>to engage</sup> in agricultural and other 'non-traditional' export production. During this period the government appeared to be responding to a primarily<sup>urban employed</sup> and self-employed constituency. Between 1980 and 1984, on the other hand, there were increasing signs of willingness on the part of the<sup>government to</sup> change important aspects of economic policy. The exchange<sup>rate was reduced</sup> more sharply, and nominal wage increases were held below the rate<sup>of</sup> inflation; government spending was cut back after 1983,<sup>and efforts to</sup> increase public revenues were made. The path taken towards reform<sup>was gradual</sup> and not without deviation. Furthermore, its impact on macro indicators had not yet - by 1984 - been substantial.

The policy reforms which were introduced in 1985 changed things dramatically. Those who had been protected under the 1975-80<sup>policy stance</sup> were hardest hit by massive escalation of import prices engendered<sup>by the</sup> auction. In the short-run, however, almost everyone lost out. The changes caused a sharp change in relative prices - in favour of the<sup>producers of</sup> agricultural and manufactured goods. But there was a lag before production - could respond during which time production inputs, food and<sup>other consumer</sup> goods had to be financed at the new higher prices. The rejection of<sup>reform,</sup> and of the DMF programme, by the government, was certainly a triumph for the sectional interests favoured by policy during 1975-80. But their victory<sup>was</sup> made easier by the speed and severity of economic change which<sup>had hurt even</sup> those who were to benefit in the medium term. It is possible,<sup>given the</sup> composition of power within the ruling party, that a continuation<sup>of the more</sup> gradualist approach to policy reform that characterised 1980-84 would also, eventually, have been rejected. But it would certainly<sup>have reduced the</sup> strength of reaction and the size of those groups opposing<sup>reform. It is</sup> much more likely that the direction of reform could have been maintained<sup>than</sup> was the case with the IMF package, which, in its design, ignored<sup>the laoour</sup> market rigidities identified in this paper, and which omission<sup>ultimately led</sup> to its rejection by the Zambian people and government.
- 35 -

Although the copper price has, since 1987, recovered, its rise may well prove to be temporary. The past experience of Zambia suggests that it would be best to treat this price rise as windfall gain. A return to a - gradualist approach to policy reform albeit implemented more consistently than before - seems, in early 1989, still to hold the best promise for future recovery, on both technical and pragmatic grounds.

More generally, the Zambian case shows that serious labour market analysis should both precede and be incorporated in the design of stabilisation and adjustment programmes if they are to stand much chance of success in either political or economic tezus. The results of adopting this different approach would be to increase the time frame within which stabilisation is expected to work, to put less reliance upon currency auctions and more upon a managed approach to devaluation, and to pay more attention to the dimensions and distribution of transitional costs. In most cases, the nature of the real wage response will remain critical. But it makes little sense to presuppose that this variable will be infinitely pliant if cursory attention to economic history would demonstrate - as it does in Zambia - that such an assumption belies the facts.
36 -

-

# FOOTNOTES

- 1 These statements assume a population of 4,830,900 in 1975 and 6,465,100 in 1984 (projected on the basis of information given in Table 1), together with levels of formal employment, for those years, indicated by Table 4.

- 2 The declining trend indicated by Table 4 for the years 1964-72 relates to non-Africans, as itdicated in the notes to the Table. Although their numbers fell consistently, there was a rising tide of non-Zambian African inrAigrants from elsewhere in the continent. As is suggested by the data which use a changed basis of classification from 1973, it is believed that these trends roughly coincided in magnitude, providing approximate stability in the number of expatriates employed.

- 3 Since, however, such people remain non-nationals, they do have the option of returning to their home countries. Emigration, for them, is thus much more likely than for most members of the citizen labour force. From a supply-side point of view, therefore, it would be unwise to count automatically upon their continued presence, particularly under the recent circumstances of sharply declining incomes from wage and salaried employment.

- 4 The survey covered approximately 70 per cent of total formal employment in 1983. Focused, as it was, on the line-of-rail centres, a substantially higher proportion (perhaps 80 per cent) of non-Zambian employees was captured by the survey.

- 5 Daniel (1979sChapter 7) provides interesting evidence and argument to suggest that the period of mining wage leadership ended at a much earlier date - around 1960.

- 6 Calculated from Heesook et al. 1986: Appendix Table 6.