DETERMINANTS OF NON-TRADITIONAL AGRICULTURAL EXPORTS GROWTH IN ZAMBIA: A CASE OF COTTON AND TOBACCO

ABSTRACT 
Exports are a vital component of a nation’s balance of payments as they are source of foreign exchange and economic growth. Much of the economic growth in Zambia has been driven by copper exports, which have suffered from external shocks such as plummeting prices on the world market. It is against this background that the Government of the Republic of Zambia (GRZ) has devised a number of measures to promote export diversification to non-traditional exports with a view to reducing heavy dependency on copper and stabilise foreign exchange earnings. The non-traditional exports have recorded growth averaging about 30 percent during the period. However, the key determinants of the growth of the non-traditional exports are unknown. This study therefore endeavored to determine factors that affect the growth of two major non-traditional exports in Zambia; Cotton and Tobacco. The study employed annual time series data that spans a period of 34 years from 1980 to 2013. The Auto-Regressive Distributed Lagged (ARDL) model approach to co-integration revealed that cotton and tobacco exports are co-integrated with foreign direct investment, real effective exchange rate, real Gross Domestic Product (GDP) of trade partners, real interest rate and world price. The ARDL analysis revealed that cotton exports are affected by the real interest rate, real effective exchange rate, world price and the real income of the trading partner in the short-run. In the long-run, cotton exports are affected by real interest rate, real effective exchange rate and real GDP. Tobacco exports are significantly affected by real effective exchange rate, real income of the trading partner and foreign direct investment in the short-run while only real effective exchange rate and the real income of the trading partner affect the growth of tobacco exports in the long-run. Granger causality tests revealed that cotton and tobacco exports granger cause agricultural share of GDP. Overall, both exports are highly elastic to exchange rate movements and the importer’s GDP. There is need for government to maintain a stable exchange rate and exploit available markets through increased participation in regional integration.

CHAPTER ONE 
INTRODUCTION 
1.1 Background to the Study 
Exports are an important component of national income determination. Ideally, the higher is the level of exports relative to imports, the higher will be the level of national income. The importance of a nation’s exports cannot be overemphasized. An increase in a country’s exports of goods and services can reduce unemployment problems, improve the balance of payments, increase foreign exchange earnings and subsequently reduce heavy external borrowing. An increase in exports is a conduit through which a country can foster economic growth. Therefore, developing this sector can eradicate the high poverty levels being faced by developing countries like Zambia (Were et al., 2002). 

Like most African countries, Zambia’s economy was heavily controlled by the state after independence. The country pursued an import substitution strategy aimed at creating a manufacturing base that would encourage production of goods locally and discourage imports. The import substitution strategy was supported by earnings from copper exports whose prices were skyrocketing. To this effect, the Zambian government after independence in 1964 imposed exorbitant import tariffs that were as high as 150 percent. In addition, the import substitution strategy also led to a highly protective exchange rate regime (fixed exchange rate system). The overvalued Kwacha during this period had negative repercussions on other sectors of the economy such as agriculture as they reduced earnings realized by farmers from export of agricultural cash crops (World Bank, 1984). The agriculture sector was also taxed through low and unfavorable producer prices of maize offered to farmers. 

Inefficient policies such as subsidies were pursued mainly to increase production of maize while producers of other agricultural crops were heavily taxed. Furthermore, the rural areas, where the maize was produced were largely isolated in terms of infrastructural development while earnings from copper were used for infrastructural development in urban areas. The agricultural sector was just seen as way of satisfying the food needs of the ever- increasing urban population. However, the country recorded moderate growth during this period, largely due to favorable copper prices on the international market. The rate of growth of Gross Domestic Product (GDP) averaged 3.4 percent during this period (Bonnick, 1997). 

The plummeting copper prices in 1974 due to external oil shocks led to the state driven import substitution strategy to become impracticable, infeasible and unsustainable. The country’s heavy reliance on a mono export commodity was exposed. Government could not raise its much-needed revenue to finance its developmental projects hence resorting to external borrowing that had a negative impact on the balance of payments. The country experienced an upsurge in total external debt from US$1 billion in 1973 to US$ 3 billion in 1983 (Bonnick, 1997). 

However, with a change in government in 1991, the economy was liberalized and the country reversed some of the negative growth experienced over the previous two decades. In stark contrast to the negative growth of GDP prior to liberalization, the GDP growth averaged 2.5 percent between 1991 and 1995 (Hill, 2004). There has been a reversal in trade policy since then with a view to diversifying the economy away from copper. Reforms have included liberalization of the country’s external sector through abolishment of controls on both imports and exports. Non-tariff barriers have been removed while tariff barriers have been lowered to allow exporters access to inputs at world prices. Other incentives on the export side have included removal of export taxes. A duty-draw back system has been put in place where exporters are refunded the tariffs imposed on inputs used in export production (Ndulo, 2004). The country has been active in regional integration by being a member of the Common Market for Eastern and Southern Africa (COMESA) and Southern Africa Development Community (SADC) and other ad hoc trade arrangements hence expanding its market base for its exports. SADC has been the largest bloc in terms of trade of non- traditional exports accounting for 35 percent of total trade while COMESA has accounted for about 3 percent of the total trade in non-traditional exports, the majority of which are exported to South Africa (ZDA, 2013). 

The trade policy is succinctly outlined in the policy framework papers and the country’s five-year development plans (GRZ, 1994). The development plans have identified establishment of Multi-Facility Economic Zones (MFEZs) through the Zambia Development Agency (ZDA) in conjunction with the Private Sector Development Programme (PSDP) (FNDP, 2006). The Multi-Facility Economic Zones (MFEZs) are industrial zones with well- developed infrastructure put in place to attract world-class enterprises in order to facilitate domestic and international trade. The zones include numerous incentives such as zero percent taxes on profits made within five years of operation, taxation of only 50 percent of profits between 6 to 8 years of operation and 75 percent between 9 and 10 years. Other incentives include: no taxes on dividends for five years from the period of first declaration of dividends and no import tariffs on all inputs such as raw materials, machinery be it motor vehicles as long as they are meant for use in the MFEZs (MCTI, 2015). The export development strategy as outlined in the Sixth National Development Plan (SNDP) has been aimed at removal of supply- side constraints in the production of non-traditional exports and promoting non-traditional exports through attracting Foreign Direct Investment (FDI) into non-mining sectors (SNDP, 2014). The liberalization of the economy has coincided with the growth of non-traditional exports (mostly agricultural output) such as cotton lint, cotton yarn, sugar, flowers, vegetables, tobacco and other non-agricultural products such as electrical energy, lime, gemstones and copper wire (CSO, 2015). Earnings from non- traditional exports have increased albeit their share of total exports earnings declining during some periods. For most rural households who grow export crops, Non-Traditional Exports (NTEs) are becoming an important source of income and employment. However, there has been lack of value addition to the non-traditional exports with the majority of them exported in raw form (FNDP, 2006).

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Item Type: Kenyan Postgraduate Material  |  Attribute: 73 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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