2.9 Market failure - public goods Questionbank

Zambia’s Economic Transition: From Copper Dependency to Sustainable Development

Zambia is a landlocked country in south-central Africa with an estimated population of 19 million. Over the past decade, Zambia’s economy has experienced moderate growth driven largely by copper exports, which account for nearly 70% of the country’s total export earnings. However, frequent fluctuations in global commodity prices have resulted in volatile export revenues. In 2022, the Zambian kwacha depreciated by nearly 10%, trading at around ZMW18 per US dollar, raising concerns over inflation and the cost of imported goods.

The government has sought to promote economic diversification beyond copper by investing in agriculture, tourism, and small-scale manufacturing. Despite these efforts, poverty remains widespread: approximately 54% of the population lives below the national poverty line, with rural areas most severely affected. To tackle this, Zambia’s government increased social spending: in 2021, about 12% of its total budget was allocated to improving rural infrastructure, secondary education, and healthcare services. Policymakers hope that these measures will boost productivity and reduce inequality in the long run.

One persistent challenge is maintaining macroeconomic stability in the face of high external debt and fluctuating copper prices. Inflation has hovered between 15% and 20% annually in the past few years. The government implemented tighter monetary policies in late 2021, including higher reserve requirements for commercial banks, aiming to limit excess money creation and stabilize the exchange rate. In addition, Zambia entered negotiations with international financial institutions for debt restructuring, seeking to create more fiscal space for social programs.

On the microeconomic front, price floors and subsidies in the agricultural sector continue to spark debate. Maize, the country’s staple crop, has benefited from guaranteed minimum prices set by the Food Reserve Agency. Proponents argue this policy supports farmers’ incomes and food security, while critics fear inefficiencies and budgetary strains. Furthermore, access to credit remains a bottleneck for many small and medium-sized enterprises (SMEs), preventing them from scaling up and creating more job opportunities.

Zambia also participates in regional trade agreements, such as the Common Market for Eastern and Southern Africa (COMESA). Tariff reductions within the region have encouraged some diversification in exports—particularly of agricultural goods and textiles to neighboring countries. Recently, the government signed a new bilateral trade deal with Malawi and Zimbabwe to reduce non-tariff barriers, with the idea of boosting cross-border trade. Officials hope this agreement will expand the market for Zambia’s emerging non-traditional exports, such as processed foods and manufactured goods, fostering greater resilience against future commodity price shocks.

Despite these positive developments, inequality and poverty remain pressing concerns. The government estimates that about 300,000 new entrants join the labor force annually, yet formal employment growth lags behind. Zambia’s human development indicators highlight the challenges: literacy rates in some rural provinces remain below 60%, while malnutrition affects nearly 35% of children under five. The government is therefore focusing on vocational training and improved healthcare to interrupt what development economists often refer to as the “poverty cycle,” wherein low incomes lead to low investment in human capital, perpetuating underdevelopment.

Private foreign direct investment (FDI) has recently targeted not only mining but also Zambia’s small manufacturing sector and retail services. However, uncertainty around regulatory changes and debt sustainability may temper investor confidence. If foreign investment in education and healthcare can be encouraged alongside initiatives to improve infrastructure, many economists believe Zambia has the potential to achieve more stable and inclusive growth.

Overall, Zambia’s policy mix aims to balance immediate social needs with sustainable growth. While copper exports will likely remain an important source of foreign exchange, reducing dependence on a single commodity is widely seen as essential. The combination of social programs, targeted subsidies, and deepening regional trade may help Zambia overcome enduring challenges related to poverty, volatility, and a narrow economic base.

Table 1: Zambia’s Selected Macroeconomic Indicators (2019–2022)

Table 2: Zambia’s Sectoral Export Composition (2022)

Microeconomics

Text A: The Coffee Market in Country Z

Country Z is a major producer of coffee beans, contributing significantly to its export revenues. However, due to a global oversupply of coffee, prices have fallen dramatically, impacting the incomes of local farmers. To support farmers, the government introduced a price floor above the equilibrium price. While this has stabilized farmer incomes, it has resulted in surplus production and increased government spending on storing unsold coffee.

In response to environmental concerns, Country Z has also introduced subsidies for farmers who adopt sustainable farming methods. Critics argue that while these measures aim to support farmers, they distort market efficiency and divert resources from other sectors of the economy.

Table 1: Coffee Production and Government Intervention

Text B: Regional Economic Cooperation in Country Y

Country Y recently joined a regional trade bloc that promotes free trade and economic integration. This has resulted in the removal of tariffs on agricultural and industrial goods traded within the bloc. The government hopes the trade bloc will help diversify the economy, currently reliant on exports of low-value-added agricultural products.

However, small-scale farmers in Country Y have struggled to compete with larger, more efficient producers from neighboring countries. To address this, the government is providing subsidies to small-scale farmers to improve productivity. Critics warn that the focus on agricultural subsidies may hinder the country’s transition to a more industrialized economy.

Table 2: Trade Performance in Country Y

Country A has seen a significant increase in the consumption of soft drinks, leading to concerns about rising health issues such as obesity and diabetes. To address this, the government introduced a 20% excise tax on sugary beverages, aiming to reduce consumption. The tax has resulted in an increase in the price of soft drinks by 15% and a 10% decline in quantity demanded.

Some beverage companies have adapted by offering low-calorie alternatives, while others have lobbied for tax exemptions, arguing that the tax disproportionately affects low-income households. Meanwhile, the government has launched public health campaigns and introduced $50 million in subsidies for local farmers to grow fruits and vegetables, aiming to promote healthier diets and reduce dependency on sugary beverages.

Table 1: Price and Quantity of Soft Drinks in Country A Before and After Tax

Country B is a member of a regional economic bloc that recently transitioned from a free trade area to a customs union. This change led to the removal of tariffs on intra-bloc trade and the introduction of a 10% common external tariff on imports from non-member countries.

Trade within the bloc has flourished, with exports increasing by 25%. However, some domestic businesses struggle to compete with larger firms from neighboring countries. Additionally, while integration has boosted investment in infrastructure and renewable energy, it has widened income inequality between urban and rural areas, as rural communities lack access to the same economic opportunities.

Table 2: Trade and Income Inequality in Country B