By Anand Rajaram, Dennis Chiwele, Mwanda Phiri
Abstract
With a cyclical and capital-intensive copper industry, landlocked Zambia faces a number of hurdles to economic diversification and job creation even as the labor force has grown rapidly. The headline story about structural transformation from the past three decades is: (a) a manufacturing sector that has plateaued at below 10 percent in share of GDP and only 4 percent of employment; (b) a service sector that has grown explosively and now accounts for 54 percent of GDP and 24 percent of employment; and (c) an agricultural sector with only 3 percent share of GDP but a substantial 57 percent share of employment. Over 85 percent of the labor force is employed in an expanding but low productivity informal sector, as a result of the stunting of the formal sector, which employs less than 15 percent of labor. Youth unemployment is high and the failure to generate enough high productivity jobs is a major factor in the rising inequality in Zambia.
This case study seeks to identify areas of promise for productive employment growth and policies in Zambia that might enhance their job creation. Between 2005 and 2018, industries such as finance and business, agro-processing, transport, storage, and ICT, and formal wholesale and retail trade (a group designated as industries without smokestacks (IWOSS)) grew employment more rapidly than traditional industries. These are industries that are: (a) tradeable; (b) able to employ moderately skilled workers; (c) achieve higher-than- average productivity; and (d) capable of technological change and benefitting from agglomeration. Employment elasticity of output growth in the IWOSS sector in Zambia is strongly positive and higher than for non-IWOSS. As such, there is potential to expand employment in these industries, with agro-processing, horticulture, floriculture, tourism, and a small but dynamic ICT industry offering scope for growth in productive employment.
The experience of growth in both IWOSS and non-IWOSS industries has been influenced by both economywide as well as industry-specific constraints. Macroeconomic conditions have deteriorated and raised the risks and reduced the reward for private firms, limiting their growth. Labor market regulations are increasingly a deterrent to formal sector employment. Skills are also a constraint for the formal sector. Beyond these generally unfavorable conditions for employment growth, there are specific constraints that limit individual sectors and industries. Tourism, horticulture, and floriculture are constrained by the limited air transport links between Zambia and the rest of the world, which raise costs and reduce competitiveness of Zambian exports. The ICT sector faces shortage of critical skills in network management and cyber security. While Zambia ranks relatively highly in the Doing Business rankings, administrative delays and licensing requirements are also seen to be onerous in tourism, agro-processing, and horticulture.
The outlook for productivity-raising employment expansion for a growing youthful workforce is thus challenging. But three areas of reform would help improve the potential for fairly rapid employment growth in Zambia: restore and credibly sustain macroeconomic stability; restore flexibility to the labor market; and implement medium-term strategy for improving human capital in order to address skill gaps, including in the IWOSS sectors. Addressing these important issues would allow the process of structural transformation that would contribute positively to employment creation, poverty reduction, and the goals of Vision 2030.
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Photo credit: Arne Hoel/World Bank
