Zambia improves in economic freedom, says Heritage Foundation & Wall street journal

United States based think-tank Heritage Foundation and The Wall Street Journal have ranked Zambia number 91 freest economy for 2011.
The annual index is a data-driven analysis of 179 countries, which tracks economic freedom in ten areas, from trade and fiscal freedom and public spending, to investment freedom and property rights.
The foundation say Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please.
In 2011, Zambia’s economic freedom score is 59.7, making its economy the 91st freest in the 2011 Index. Its score has increased by 1.7 points, reflecting improved scores in four of the 10 economic freedoms, including freedom from corruption. Zambia is ranked 10th out of 46 countries in the Sub-Saharan Africa region, and its overall score is just above the world average.
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According to the index, previous reform measures, coupled with relative political stability, have enabled the Zambian economy to maintain steady economic expansion averaging about 6 percent over the past five years. The financial sector has benefited from reforms, including implementation of the Financial Sector Development Plan. Despite the challenging environment, the sector has weathered the global financial turmoil relatively well. Management of public finance has been sound, although the fiscal deficit has been on the rise recently.
Progress in governance reform, development of a more robust private sector, and diversification of the economy has been sluggish. Lingering institutional shortcomings include inefficient legal and regulatory frameworks, weak protection of property rights, and corruption.
In 1991, growing popular discontent led the government of Kenneth Kaunda, who had ruled since independence in 1964, to enact a new constitution instituting multi-party democracy. Frederick Chiluba was elected president and pursued economic reform, but his administration was dogged by allegations of corruption. Levy Mwanawasa, elected in 2001 and re-elected in 2006, made fighting corruption the centerpiece of his presidency. President Rupiah Banda won a narrow victory in October 2008 following Mwanawasa’s death. Zambia was the world’s third-largest copper producer and a middle-income nation in the 1960s, but falling copper prices and mismanagement of state-owned mines led to steadily declining income from 1974 to 1990. Copper remains the biggest export, but mining contributes only about 10 percent of GDP, and subsistence agriculture employs about three-quarters of the workforce. HIV/AIDS is a significant problem.
Despite some reforms in recent years, the regulatory environment does not promote entrepreneurial activity. Requirements for commercial licenses are time-consuming and costly. Enforcement of regulations is inconsistent.
Zambia’s weighted average tariff rate was 3.8 percent in 2009. Zambia is a member of the Common Market for Eastern and Southern Africa (COMESA). Corruption, import and export bans and restrictions, services market access barriers, import and export permit and certification requirements, non-transparent standards and government procurement procedures, and preferences for government-owned enterprises add to the cost of trade. Ten points were deducted from Zambia’s trade freedom score to account for non-tariff barriers.
Zambia’s tax rates are relatively high. Both the top income tax rate and the top corporate tax rate are 35 percent, with an array of special rates for banks, mining companies, and farmers. Personal income tax owed may be elevated if local authorities add an allowable 2 percent levy on a small portion of income. Other taxes include a value-added tax (VAT) and a property transfer tax. In the most recent year, overall tax revenue as a percentage of GDP was 17.5 percent.
Government spending is relatively low. In the most recent year, total government expenditures, including consumption and transfer payments, equaled 24.6 percent of GDP. Despite ambitious reform plans, progress in improving spending management has been slow.
Inflation has been high, averaging 12.9 percent between 2007 and 2009. The government subsidizes agricultural production inputs and influences prices through state-owned enterprises and utilities. Fifteen points were deducted from Zambia’s monetary freedom score to account for measures that distort domestic prices.
Zambia’s government does not discriminate between foreign and domestic investors. An investment board screens investments for which incentives are requested. While the government has made progress on reforming the investment regime, bureaucracy can be slow, competition policy remains inadequate, contract enforcement can be weak, work permits can be difficult to obtain for foreign labor, and the dispute resolution process is burdensome. Corruption remains another important deterrent to investment. Residents and non-residents may hold foreign exchange accounts. There are no controls on payments, transfers, capital transactions, or repatriation of profits.
Zambia has a relatively liberal banking regime, but financial intermediation and credit to the private sector remain low. The financial system is dominated by banking. The number of commercial banks has risen, with more foreign banks starting operation in recent years. Zambia National Commercial Bank, the largest bank, still accounts for over 30 percent of the sector’s total assets. Bank supervision and regulation have improved. The insurance market is open to competition. Though participation is increasing, capital markets remain small. As of mid-2010, there were about 20 companies listed in the stock exchange.
Zambia’s judicial system suffers from inefficiency, government influence, and a lack of resources. Contract enforcement is weak, and courts are relatively inexperienced in commercial litigation. Despite constitutional and legal protections, customary law and practice place women in a subordinate status with respect to property, inheritance, and marriage. Trademark protection is adequate, but copyright protection is limited and does not cover computer applications. The government has taken some steps recently toward more effective enforcement against pirated musical and video recordings, cosmetics, and software.
Corruption is perceived as widespread. Zambia ranks 99th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009, an improvement for the second year in a row. Controls on government funds and property are weak, investigative units lack authority and personnel, and officials dealing with the public frequently demand illicit payments with impunity. The issuance of land titles has been singled out as particularly susceptible to corruption. A lack of transparency surrounds the liquidation of seized assets. The Anti-Corruption Commission investigates allegations of misconduct.
Zambia’s labor regulations are outdated and not consistently applied. The non-salary cost of employing a worker is low, but due to requirements for generous severance payments, companies tend to hire workers on an informal or short-term basis. With unskilled labor abundant, an efficient labor market is not fully developed.

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