Returns to Investments as Returns to Investments as Potential ConstraintsPotential Constraints

Applied Inclusive Growth Analytics CourseJuly 1, 2009

Susanna Lundstrom, PRMED

Social Returns to Investments “The underlying potential returns to investments,

given a non-distorted economy” Geography

minerals, land-locked, energy, tourism potential, agriculture potential, etc

Infrastructure roads, electricity, mobile phones, water, rail roads, air

transport, etc Human Capital

Jesus Crespo Cuaresma’s presentation

Natural Resources and Geography Zambia is well endowed with natural resources

(water, forest, arable land, minerals) Simple international benchmarking

Endowment per capita Cross-country regression evidence:

tourist flows are much lower than expected, given Zambia’s natural endowments

estimates suggest that if the road infrastructure and the business climate were as in South Africa, Zambia’s tourist flows would be 51 percent higher than existing levels

Natural Resources and Geography- Agriculture

Both extensive and intensive expansion possible in Zambia Only 40% of arable land used Productivity studies show both

substantial employment and income potential from irrigation

Evidence of government distortions in agriculture

High indirect costs to agriculture, (direct taxes and indirect costs through macroeconomic and other distortions)

Natural Resources and Geography Mountains? (ex Tajikistan) Potential neighboring effects? Landlocked geographic position? (ex Zambia)

Pros: Serves as an import tax protecting domestic import-competing industries; borders 8 countries and plays an active role in regional trade

Cons: reaching global markets and realizing economies of scale is a problem Affects ability to export bulky low–value products (e.g. farm

products) Requires well-developed air transport and an emphasis on high

value, low weight and volume goods

Natural Resources and Geography Access to air

transport is low for Zambia’s level of per capita income

But primary roads are fairly OK Important to look at

roads in a disaggregated way Primary-Secondary Rural-Urban

ZambiaZambiaZambiaZambia

GDP per capita (logs)

Fitted values 95% CI

Infrastructure- Firm-level cost structure benchmarking gives a hint

Zambian firms have the second-highest share of “indirect” costs: energy, transport, telecom, water, insurance, marketing, travel, independent

professionals and accounting

Infrastructure- Roads in Zambia High domestic transport costs due to poor domestic

road condition and high fuel cost for one ton per one kilometer was US$0.07 in Zambia, which

was higher than in countries like South Africa (US$0.02), Malawi (US$0.07), etc

Affect the ability of rural residents to access markets 50% of the rural households were more than 9 (25) kilometers from

the nearest food (fertilizers and seeds) market Binding constraint? Net returns 10 percent lower for remote

households Look at examples where they have overcome road

constraints ex cotton growers in Zambia

Infrastructure- Roads, continued Road congestion: A sign of high demand and limited supply Dynamics (and benchmarking) of public investment in

infrastructure Direct measure of quality:

Infrastructure- ICA or BEEPs indicate constraints for firms Survey data shows that 56% of firms experienced power outages in Tajikistan

Percentage of people naming element as the biggest obstacle faced by establishments in Tajikistan. 2008

Electricity

Tax Rates

Access to Financing

Practices of Informal Competitors

Skills and Education of Workers

Corruption

Business Licensing and Permits

Access to Land

Custom and Trade Regulations

TransportTax Administration

Crime

Political Instability

Source: Tajikistan BEEPS, 2008

Private investments in power generators another potential indicator

InfrastructureConnectivity services Market monopolies or state-owned enterprises

common Mobile rate per minute – international benchmarking:

$0.44

$0.32

$0.29

$0.27

$0.25

$0.25

$0.21

$0.14

$0.10

$0.04

$0.00 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 $0.45

Zambia

Botswana

Malawi

South Africa

Tanzania

Swaziland

Namibia

Mozambique

Zimbabwe

Mauritius

InfrastructureConnectivity services

0

2

4

6

8

10

12

14

16

18

20

1999 2000 2001 2002 2003 2004 2005

Armenia Azerbaijan China

Georgia Kazakhstan Kyrgyzstan

Lao P.D.R. Moldova Mongolia

Russia Tajikistan Ukraine

Uzbekistan Turkmenistan

Internet users per 100 inhabitants

Infrastructure- Differences rural-urban

0

20

40

60

80

100

120

FoodMarket

InputMarket

Post Office PublicTransport

PublicPhone

InternetCafe

Rural

Urban

The number of households with access to facilities within five kilometers

InfrastructureNote… The reasons for poor access is not always

because of limited supply but because of industry structures and interests Zambia: electricity costs are not high compared to

countries within and outside the region, but prices are held too low for expansion outside mining

It is not only about the average availability or cost – it is also about the reliability Number of power outages, harassment/road blocks

during transport, etc… Always ask “But is it binding?”