Resurrecting INDECO: 6 reasons why this is a bad idea

If Zambians needed any further evidence that the Patriotic Front government is taking more than just a leaf from the Kenneth Kaunda school of thought, then here it is. It has recently announced that it is looking to resurrect the Industrial Development Corporation (INDECO), a defunct state-owned conglomerate which together with the Finance and Development Corporation (FINDECO) and the Mining Development Corporation (MINDECO), formed ZIMCO (the Zambia Industrial and Mining Corporation). The First President’s heavily-socialist economic reforms of 1968 existed through ZIMCO.

In his address to the nation on New Year’s Eve, President Michael Sata said the motivation for resurrecting INDECO was to fight unemployment and encourage growth in the economy. The new INDECO, he said, would focus on developing labour-intensive industries and enterprises in sectors such as agriculture, construction, manufacturing and tourism.

The first INDECO eventually collapsed after years of incurring losses which left thousands of workers unemployed and the country burdened by ever-increasing debts. This happened around the time that the Zambian economy had come under intense pressure from declining copper export earnings and rising oil prices on international markets. The result of all this was increased reliance on international financial institutions by the Kaunda government to try and fix the gaping hole in the nation’s finances. Zambia was to endure close to 30 years of financial ruin. During this period, the country fell from having one of the highest GDP per capita rates in Africa to one of the lowest in 1996, the year the Highly Indebted Poor Countries (HIPC) programme was initiated by the International Monetary Fund.

But ZIMCO did not just collapse because of unforgiving economic externalities, events outside of the government’s control. It suffered more harshly from poor management and a lack of accountability. This was as a result of the blurred lines between the Party and the State. During the Second Republic (i.e. the One-Party state period), President Kaunda’s United National Independence Party (UNIP) was the only political party allowed to operate in Zambia. With the ‘Cult of Kaunda’ still sky-high, what belonged to the corporation belonged to the party. The President had also appointed himself Chairman of ZIMCO. This meant that despite establishing a variety of enterprises across the country, ZIMCO, and in effect INDECO, were not given the freedom to operate like proper businesses.

Given the negative history, it is worth pointing out that President Sata’s plans are not wrong in themselves. It’s not wrong to want to see a reduction in unemployment or growth in the economy. What is wrong however are the very simple assumptions the President has made in coming to this policy decision. These assumptions are problematic for two reasons:

(i)            they go against the private sector development agenda of governments since 1991, his own included;

(ii)          they simply lift a failed UNIP policy from 46 years ago and assume it can be planted successfully into today’s economy with little to no thought.

Problems of poverty and unemployment in Zambia are solvable without having to go into the complicated and highly-risky process of creating state-owned enterprises, especially ones of the size being proposed. Creating a conducive environment for businesses to enter new and nascent industries is critical. Providing a fair and firm legal framework for taxation purposes and the protection of private property is necessary. Commerce Trade & Industry Minister Emmanuel Chenda is reported to have said that while the government still supported private sector investment, it recognised that many private firms did not go into risky parts of the country as these businesses are only profit-oriented. The implication of the Minister’s statement was that the government would go to these unprofitable areas shunned by the private sector, for the sake of the unemployed. This is folly of the highest order! The Post Newspaper gave its backing to the announcement saying the policy signalled “a good departure from the policy of government having no business in business.” Its editor declared: “Government has business in business.”

In my view, the Government of Zambia’s role in the economy, whichever party is in office, should be to formulate policy to support the growth of the private sector, receiving tax revenues from businesses to invest in health, education and other social and infrastructure programmes while ensuring that the law is not flouted by local or foreign investors. Our present system cannot allow for unnecessary, ill-thought out projects of the sort being suggested. It is still very prone to “leakages” such as corruption, wasteful expenditure and unhelpful political interference. We need to get our house in order first before we can even begin to think of establishing professionally-run state-owned enterprises. To justify this policy with “we are in a hurry to develop” magnifies the PF government’s reckless approach to managing the economy.

Here are 6 reasons why resurrecting INDECO is a bad idea; one that the government must bin immediately.

1. Private sector investors will be “crowded-out”

In his 2014 Budget Speech last October, Minister of Finance Alexander Chikwanda said that because of better incentives to the manufacturing industry under the Private Sector Development Programme, the sector was expected to grow by 4.3% in 2013. Manufacturers, he pointed out, were managing to import capital items at relatively lower costs. So the question is: If progress is being made in this sector, why does the government see it fit to enter the market “crowding out” private investment? Compared to the state, they are on the whole better skilled at allocating funds appropriately.

2. It further confuses the economic policy landscape

The INDECO Mark II policy was not mentioned in the recent 2014 Budget Speech by the Minister of Finance. One cannot be sure whether the Treasury is serious about making the 1.9% deficit reduction it announced because the re-establishment of INDECO will certainly involve significant expenditure. Policy incoherence has been a mark of this government and that continues to make the general public and investors jittery.

3. Politics not economics has been the motivation for this policy

According to media reports, Cabinet has already given its approval to the plans. For a major policy decision that we only heard about 5 days ago and is still lacking a plausible economic case, the INDECO Mark II plans are clearly being rushed through. Why? A political decision has been made and now government technocrats are under pressure to hurriedly put together an economic case justifying the decision. This is not the way to go.

4. The national debt needs to be kept under control

How will the INDECO Mark II plans be financed? What will the company’s commercial remit be? Nobody knows where the Minister of Finance will find the money given that the country is already struggling with an unnecessarily large budget deficit – 8.5% of GDP, 4% higher than was estimated. The Minister is likely to overshoot his target again this year as pressure from civil service unions and more expensive sovereign debt repayments beckon. Former Minister of Finance Situmbeko Musokotwane accurately pointed to the problem: “Politicians are the main source of pressure over expenditure, or for allowing unsustainable expenditure to occur without adequate brakes. In succumbing to pressure for unsustainable expenditure, macroeconomic stability becomes an orphan.”

5. INDECO Mark II will be more accountable to the party than to the public

Appointments to positions within Zambia’s embassies abroad and agencies like the Road Development Agency have been filled by PF sympathisers. Unchecked, this will only continue with the re-establishment of INDECO. The fact that President Sata is set to chair the new corporation “to ensure effective results” is a clear step in that direction.

6. There is room for government involvement in the economy. But this isn’t it.

It’s hard to argue against government involvement in the economy because the government is the chief implementer of policies that reach into different areas of a nation’s life. In business, it oversees the licensing of businesses and it seeks to ensure firms are contributing taxes as required by law. The government, by nature of being the government, will always be involved in the economy! That said, I would argue that the time for active government involvement in the economy is during times of recession. The last few years have taught us that markets won’t always self-correct. That is why a government, through its central bank, can use monetary and fiscal policy to breathe life into a struggling economy.