Report No. 71515 REPUBLIC OF NAMIBIA ADRESSING BINDING CONSTRAINTS TO STIMULATE BROAD BASED GROWTH A COUNTRY ECONOMIC REPORT October 14, 2008 Poverty Reduction Economic Management 1 Southern Africa Africa Region CURRENCY EQUIVALENTS (as of October 14, 2008) Currency Unit = Namibia Dollar (NAD) Namibian dollar 1 = US$0.10 US$1 = NAD 10 GRN FISCAL YEAR (April 1-March 31) WEIGHTS AND MEASURES Metric System ABRREVIATIONS AND ACRONYMS ACP African, Caribbean and Pacific AGOA African Growth and Opportunity Act ATC Agreement on Textiles and Clothing BLNS Botswana, Lesotho, Namibia and Swaziland BON Bank of Namibia CBPP Contagious Bovine Pleuropneumonia CBS Central Bureau of Statistics CDM Consolidated Diamond Mines CMA Common Monetary Area DMBA Deposit Money Bank Assets EPZ Export Processing Zone ETSIP Education and Training Sector Improvement Program EU European Union FDI Foreign Direct Investment FIA Foreign Investment Act FIAS Foreign Investment Advisory Service FMD Foot and Mouth Disease FSAP Financial Sector Assessment Program GDP Gross Domestic Product GER Gross Enrollment Ratio GNI Gross National Income GRN Government of Republic of Namibia HIV/AIDS Human Immunodeficiency Virus and Acquired immunodeficiency HRV Hausmann, Rodrik and Velasco ICA Investment Climate Assessment IPPR Institute of Public Policy Research IMF International Monetary Fund IRR Internal Rate of Return MDG Millennium Development Goal MFN Most Favored Nation MOHSS Ministry of Health and Social Services MTEF Medium-term Expenditure Framework MTI Ministry of Trade and Industry NAC National AIDS Committee NACOP National Aids Coordination Program NCA Northern Community Areas NCCI Namibia Chamber of Commerce and Industry NDP National Development Plan NEPRU The Namibian Economic Policy Research Unit NER Net Enrollment Ratio ii NHIES Namibia Household Income and Expenditure Survey NIC Namibia Investment Centre NLFS Namibia Labor Force Survey NMA Namibia Manufacturer’s Association NPRAP National Poverty Reduction Action Program NSX Namibian Stock Exchange OECD Organization for Economic Co-operation and Development PRS Poverty Reduction Strategy PTR Pupil Teacher Ratio PTT Permanent Technical Team RSA Republic of South Africa SACU Southern Africa Customs Union SADC Southern African Development Community SADF South African Defense Force SBCGT Small Business Credit Guarantee Trust SMA Social Marketing Association SME Small and Micro Enterprises SMLE Small, Medium and Large Enterprises SSA Sub-Saharan Africa SWAPO South West Africa People’s Organization SWATF South West African Territory Forces TDCA Trade, Development and Cooperation Agreement TFP Total Factor Productivity TNDP Transitional Development Plan UN United Nations VAT Value Added Tax VCF Veterinary Cordon Fence VCT Voluntary Counseling and Testing WTO World Trade Organization Vice President: Obiageli Katryn Ezekwesili Country Director: Ruth Kagia Sector Manager: John Panzer Task Team Leader: Preeti Arora iii TABLE OF CONTENTS ACKNOWLEDGEMENTS ....................................................................................................................VIII EXECUTIVE SUMMARY ........................................................................................................................IX CHAPTER 1. COUNTRY BACKGROUND.............................................................................................. 1 I. INTRODUCTION .................................................................................................................................. 1 II. OBJECTIVES OF THE CER .................................................................................................................. 1 III. LEGACY OF COLONIAL RULE – A DUAL ECONOMY .......................................................................... 2 IV. POST INDEPENDENCE RESPONSE ....................................................................................................... 3 CHAPTER 2. GROWTH AND EMPLOYMENT RECORD............................................................... 7 I. INTRODUCTION .................................................................................................................................. 7 II. OUTPUT PERFORMANCE AND LABOR DYNAMICS .............................................................................. 9 III PRODUCTIVITY DYNAMICS .............................................................................................................. 14 IV EMPLOYMENT DYNAMICS ............................................................................................................... 21 V. SUMMARY AND CONCLUSIONS ........................................................................................................ 25 CHAPTER 3. THE BINDING CONSTRAINTS TO GROWTH IN NAMIBIA .............................. 28 I. INTRODUCTION ................................................................................................................................ 28 II. A CONCEPTUAL FRAMEWORK FOR GROWTH DIAGNOSTICS ............................................................ 28 III. APPLICATION TO NAMIBIA: IDENTIFYING BINDING CONSTRAINTS TO GROWTH ............................. 30 A. FINANCING CONSTRAINTS ............................................................................................................... 30 Saving and Investment......................................................................................................................... 30 Credit Availability and Access to Financial Services.......................................................................... 33 Trends in Domestic Credit Growth ..................................................................................................... 34 Access to Financial Services and Lending to SMEs............................................................................ 35 Conclusion........................................................................................................................................... 38 B. SOCIAL RETURN TO FACTORS OF PRODUCTION .............................................................................. 38 Rewarding Scarcity through returns to Education.............................................................................. 38 Conclusion........................................................................................................................................... 43 Geography and Infrastructure............................................................................................................. 43 Conclusion........................................................................................................................................... 43 C. PRIVATE APPROPRIABILITY ............................................................................................................. 43 Rule of Law, Economic Freedom and the Investment Climate............................................................ 44 Corruption and human rights ...........................................................................................................................44 Doing business and investment climate...........................................................................................................44 Conclusion.......................................................................................................................................................47 Labor Market Rigidities ...................................................................................................................... 47 Conclusion........................................................................................................................................... 52 Exchange Rate Regime........................................................................................................................ 52 Conclusion........................................................................................................................................... 54 Structure of the Common External Tariff (CET) and Tariff Preferences ............................................ 54 Conclusion........................................................................................................................................... 59 IV. SUMMARY AND CONCLUSIONS ........................................................................................................ 59 Building Human Capital ..................................................................................................................... 59 Addressing Labor Market Rigidities ................................................................................................... 59 Export Diversification ......................................................................................................................... 61 CHAPTER 4. POVERTY AND INEQUALITY .................................................................................. 62 I. INTRODUCTION ................................................................................................................................ 62 II. POVERTY PROFILE ........................................................................................................................... 62 Demographic Factors.......................................................................................................................... 63 Asset Ownership and Poverty Status................................................................................................... 69 Major economic activities by poverty groups...................................................................................... 72 Structure of Household Basic Consumption Expenditures.................................................................. 75 iv III. INEQUALITY .................................................................................................................................... 75 IV. BENEFIT INCIDENCE ANALYSIS FOR HEALTH AND EDUCATION SECTORS ......................................... 77 V. DETERMINANTS OF POVERTY .......................................................................................................... 82 VI. HIV/AIDS ...................................................................................................................................... 85 Trends in the Prevalence Rate............................................................................................................. 85 VII. SUMMARY AND CONCLUSIONS ........................................................................................................ 89 CHAPTER 5. GROWTH PROSPECTS IN AGRICULTURE, FISHERIES AND MANUFACTURING.................................................................................................................................. 91 I. UNLEASHING THE POTENTIAL OF THE AGRICULTURE SECTOR .......................................................... 92 Overview of the agriculture sector ...................................................................................................... 93 Livestock Farming............................................................................................................................... 94 Crop Farming...................................................................................................................................... 97 Key issues and constraints ................................................................................................................ 100 Agricultural activities with demonstrated potential .......................................................................... 101 Conclusions ....................................................................................................................................... 102 II FISHING ......................................................................................................................................... 103 III. UNLEASHING THE POTENTIAL OF THE MANUFACTURING SECTOR ................................................. 105 Overview of the manufacturing sector .............................................................................................. 106 Efforts aimed at increasing manufacturing output............................................................................ 108 Constraints to the growth of the manufacturing sector ..................................................................... 108 APPENDICES........................................................................................................................................... 111 APPENDIX 1: NAMIBIA GDP BY SECTOR (CONSTANT 1995 PRICES – N$ MILLIONS) ............................... 112 APPENDIX 2: NAMIBIA GDP BY SECTOR (CURRENT PRICES – PERCENTAGE CONTRIBUTIONS) ............... 113 APPENDIX 3: NAMIBIA EXPORTS OF GOODS AND SERVICES ................................................................... 114 APPENDIX 4: NAMIBIA’S AGRICULTURAL PRODUCTION AND EXPORTS (SELECTED COMMODITIES) 1997- 2004, 1000S TONS (% EXPORTED) .......................................................................................................... 115 REFERENCES.......................................................................................................................................... 116 TABLE OF FIGURES FIGURE 1.1: SOURCES OF GROWTH ............................................................................................................ X FIGURE 2.1: REAL GDP GROWTH .............................................................................................................. 7 FIGURE 2.2: SECTORAL OUTPUT SHARES ................................................................................................... 8 FIGURE 2.3: SECTORAL OUTPUT GROWTH RATES ...................................................................................... 8 FIGURE 2.4: EMPLOYMENT IN KEY SECTORS ........................................................................................... 11 FIGURE 2.5: EMPLOYMENT GAINERS AND SHEDDERS .............................................................................. 12 FIGURE 2.6: NAMIBIA GROWTH DECOMPOSITION .................................................................................... 14 FIGURE 2.7: PRODUCTIVITY GROWTH ...................................................................................................... 17 FIGURE 2.8: LABOR PRODUCTIVITY RELATIVE TO AGRICULTURE, 2004.................................................. 18 FIGURE 2.9: EMPLOYMENT SHARE VS OUTPUT SHARE BY SECTORS ........................................................ 19 FIGURE 2.10: DECOMPOSING LABOR PRODUCTIVITY (Y/L) GROWTH........................................................ 20 FIGURE 2.11: ALLOCATIONAL INEFFICIENCY ............................................................................................. 21 FIGURE 2.12: YOUTH UNEMPLOYMENT (BROAD DEFINITION), 1997, 2000 & 2004 (%) ........................... 22 FIGURE 2.13: UNEMPLOYMENT RATE AND LABOR FORCE ......................................................................... 23 FIGURE 2.14: EMPLOYMENT GENERATION (1997-2004) ............................................................................ 24 FIGURE 2.15: EMPLOYMENT GROWTH RATE .............................................................................................. 25 v FIGURE 3.1: GROWTH DIAGNOSTICS ........................................................................................................ 29 FIGURE 3.2: FDI IN NAMIBIA, 1991-2004................................................................................................ 32 FIGURE 3.3: WAGE DISPARITY INTRA AND INTER-OCCUPATIONS ............................................................ 42 FIGURE 3.4: RIGIDITY OF WORKING HOURS............................................................................................. 48 FIGURE 3.5: RIGIDITY IN FIRING OF LABOR COMPARED........................................................................... 48 FIGURE 3.6: RIGIDITY OF EMPLOYMENT COMPARED ............................................................................... 49 FIGURE 4.1: SHARE OF POOR HOUSEHOLDS BY SEX AND REGION ............................................................ 65 FIGURE 4.2: GINI COEFFICIENTS – NAMIBIA AND RESOURCE-RICH COUNTRIES ...................................... 76 FIGURE 4.3: DISTRIBUTION OF HOUSEHOLD CONSUMPTION EXPENDITURE BY QUINTILES ...................... 76 FIGURE 4.4: MEAN CONSUMPTION EXPENDITURES IN N$ BY REGION ..................................................... 77 FIGURE 4.5: PREVALENCE RATE AT CENTERS SURVEYED SINCE 1994..................................................... 87 FIGURE 5.1: NAMIBIAN CATTLE POPULATIONA, 1993-2004 .................................................................... 94 FIGURE 5.2: MARKETING OF SMALL STOCK .............................................................................................. 95 FIGURE 5.3: OSTRICH PRODUCTION ......................................................................................................... 96 FIGURE 5.4: MILK PRODUCTION............................................................................................................... 99 FIGURE 5.5: GRAPE PRODUCTION AND PRICES – 1995-2007.................................................................. 101 FIGURE 5.6: COMPOSITION OF MANUFACTURED EXPORTS (PERCENT), 1995…………………………..109 FIGURE 5.7: PERCEPTIONS OF LARGE AND SMALL ENTERPRISES ABOUT BARRIERS TO INVESTMENT .. 109 LIST OF TABLES TABLE 2.1: AGRICULTURE SHARE OF EMPLOYMENT AND LABOR FORCE........................................................ 9 TABLE 2.2: SECTORAL CONTRIBUTION TO GROWTH .................................................................................... 10 TABLE 2.3: ECONOMY-WIDE REALLOCATION ......................................................................................... 14 TABLE 2.4: LABOR FORCE PARTICIPATION RATES .................................................................................. 15 TABLE 3.1: SAVINGS RATE AS A PERCENTAGE OF GDP, 2000-2006...................................................... 31 TABLE 3.2: SAVING, INVESTMENT AND GROWTH RATES (PERCENT OF GDP)......................................... 33 TABLE 3.3: RURAL/URBAN IMBALANCES IN NAMIBIA, 1999 .................................................................. 36 TABLE 3.4: COMMERCIAL BANKS LOANS TO SMES BY REGION ............................................................. 37 TABLE 3.5: DOING BUSINESS RANKING OUT OF 175 COUNTRIES ............................................................ 45 TABLE 3.6: ECONOMIC OPENNESS, 2000-2006 ....................................................................................... 53 TABLE 3.7: HERFINDAHL INDEX (HHI) OF EXPORT CONCENTRATION FOR SELECTED AFRICAN COUNTRIES ........................................................................................................................... 54 TABLE 3.8: DISTRIBUTION OF TARIFF LINES AND IMPORTS BY MFN TARIFF RATE FOR SELECTED COUNTRIES……………………………………………………………………………….…57 TABLE 4.1: PERCENTAGE OF POOR AND SEVERELY POOR HOUSEHOLDS BY REGION……………………65 TABLE 4.2: POVERTY GROUPS AND AGE STRUCTURE BY REGION .......................................................... 64 TABLE 4.3: POVERTY INCIDENCE BY GENDER ........................................................................................ 65 TABLE 4.4: LEVEL OF EDUCATION OF HOUSEHOLD HEAD BY SEX AND REGION ..................................... 67 vi TABLE 4.5: SHARE OF POOR AND NON POOR HOUSEHOLDS BY LEVEL OF EDUCATION .......................... 68 TABLE 4.6: LEVEL OF EDUCATION OF HOUSEHOLD HEAD BY RURAL / URBAN AND REGION ................. 69 TABLE 4.7: LAND TENURE TYPE FOR POOR HOUSEHOLDS...................................................................... 70 TABLE 4.8: ACCESS TO FIELD FOR CROPS AND GRAZING LAND BY THE POOR HOUSEHOLDS ................. 70 TABLE 4.9: LIVESTOCK OWNERSHIP BY POVERTY GROUP (PERCENT) .................................................... 71 TABLE 4.10: PROPORTION OF HOUSEHOLDS NOT OWNING THE STATED DURABLES ................................ 72 TABLE 4.11: MAIN SOURCE OF INCOME BY POVERTY GROUP .................................................................. 72 TABLE 4.12: MAIN SOURCE OF INCOME BY REGION FOR 1993/4 AND 2003/4 (PER CENT) ........................ 73 TABLE 4.13: MAIN SOURCE OF INCOME OF POOR HOUSEHOLDS ............................................................... 74 TABLE 4.14: PERCENTAGE MEAN SHARE OF BASIC GOODS EXPENDITURE .............................................. 75 TABLE 4.15: MEAN DISTANCE TO HEALTH FACILITY (KM)....................................................................... 78 TABLE 4.16: MEAN DISTANCE TO PRIMARY SCHOOLS.............................................................................. 78 TABLE 4.17: MAIN SOURCE OF WATER FOR POOR HOUSEHOLDS (PERCENT)............................................ 80 TABLE 4.18: MEAN DISTANCE TO DRINKING WATER ............................................................................... 81 TABLE 4.19: MAIN SOURCE OF ENERGY FOR POOR HOUSEHOLDS ............................................................ 81 TABLE 4.20: RESULTS OF LOGIT ANALYSIS ON POVERTY STATUS IN NAMIBIA ........................................ 82 TABLE 4.21: RESULTS OF LOGIT ANALYSIS ON POVERTY STATUS BY REGION.......................................... 84 TABLE 4.22: OVERALL PREVALENCE RATE .............................................................................................. 86 TABLE 4.23: REGIONAL PREVALENCE RATES ........................................................................................... 88 TABLE 4.24: VOLUNTARY COUNSELING AND TESTING PREVALENCE RATE ............................................. 88 TABLE 5.1: AGRICULTURAL OUTPUT (CURRENT PRICES - N$ MILLION).................................................. 93 TABLE 5.2: AGRICULTURAL GROSS DOMESTIC PRODUCT (CONSTANT 1995 PRICES – N$ MILLION)....... 93 TABLE 5.3: EXAMPLES OF OPPORTUNITIES ARISING FROM TRADE INTEGRATION ................................ 101 TABLE 5.4: LANDINGS OF MAIN SPECIES, 1997-2004 (000 TONS)........................................................ 104 TABLE 5.1: TOTAL ALLOWABLE CATCHES IN NAMIBIA (TONS) ............................................................. 105 TABLE 5.2: COMPOSITION OF MANUFACTURED PRODUCTS (IN PERCENT)............................................. 106 TABLE 5.7: HERFINDAHL IINDEX OF EXPORT CONCENTRATION FOR MANUFACTURED EXPORTS FROM SELECTED AFRICAN COUNTRIES ........................................................................................ 107 LIST OF BOXES Box 1: Colonial History and the Path to Independence…………………………………3 Box 2: Education and Human Capital………………………………………………...41 Box 3: What Evidence of Market Failure in Namibia’s Meat Sector………………..102 vii ACKNOWLEDGEMENTS This report has been prepared by the World Bank in close collaboration with the Republic of Namibia. The Government established a Country Economic Review Task Team to work closely with the Bank team. The Government team was led by Ms. Susan Lewis, Director of Development Cooperation, National Planning Commission and included: Messrs/Mmes. Sylvestor Mbangu, Ndamona Kali, Mary Hangula, Bertha Njembo, Ndina Nghiwete, Sylvanus Nambala, Matthew Nelenge, Asoka Seneviratne, U. Muundjua, Mihe Gaomab, Postrick Mushendami, Gerson Kadhikwa, Panduleni Kali, Roux Sampati, Klaus Shade and Rainer Ritter. Messrs./Mmes. James Odada, Sylvanus Ikhide, Erwin Naimhwaka, Maano Nepembe, Rehabeam Shilimela, Mariama Deen-Swarray, Ben Biwa, Gerson Kadhikwa, Vitalis Ndalikokule, Musunuru Rao contributed to background papers for the Report on behalf of the Republic of Namibia. The report benefited from the support and guidance of Mr. Mocks Shivute, Permanent Secretary, National Planning Commission. Guidance from Mr. Paul Hartmann, Deputy Governor of the Bank of Namibia, Mr. Calle Schlettwein, Permanent Secretary, Ministry of Finance, Mr. A. Ndishishi, Former Permanent Secretary, Ministry of Trade and Industry, and Ms. U. Hiveluah, Permanent Secretary, Ministry of Labor and Social Welfare, is also gratefully acknowledged. From the World Bank side, the report was prepared by a team led by Preeti Arora (Senior Country Economist, World Bank) and comprising Francisco Carniero, Boniface Essama-Nssah, Atsede Aemro-Selassie, Xiao Ye, Ian Gillson, Fahrettin Yagci, Gerald Meyerman, Andrew Henley, Fabiano Bastos, Peter Moll, Rogier van den Brink and Ben Bennett. Lucson Pierre-Charles provided administrative support. The team benefited from discussions with Eugenia Marinova and colleagues from AFTP1. Overall quality assurance was provided by Emmanuel Akpa (Sector Manager up to draft report), John Panzer (Sector Manager) and Ritva Reinikka (Country Director). Peer Reviewers are Edgardo Favaro, Klaus Deininger (up to the Concept Review) and Benu Bidani. The team wishes to acknowledge the support from other Development Partners, particularly the European Union and Sweden for their willingness to share their knowledge and expertise on the ground as well as providing financial support for conducting some of the background work. Discussions with IPPR, NEPRU, LaRRI, the University of Namibia, Trade Unions, and Employers Federation provided valuable insights. viii EXECUTIVE SUMMARY Since Independence in 1990, Namibia has enjoyed political and economic stability. i. It has deepened its democratic institutions, and adopted a wide array of reforms and policies to bring about a significant transformation of the social fabric of the country. Deliberate efforts of the Government and people of Namibia have brought about more accessible and widely utilized education, health, housing, water resources and other social services, which were previously only restricted to a minority of Namibians. Nevertheless, the dual legacy of the colonial rule can still be widely observed. ii. On the positive side, Namibia has a well functioning physical infrastructure, a strong institutional foundation for market development, sound economic policies and a reasonably well-organized apparatus for public administration. The private sector continues to play a dominant role in key productive sectors – mining, agriculture and fishing. The transportation network of roads, railways, airports and harbors are well developed. Per capita income is among the highest in sub-Saharan Africa. iii. On the other hand, the population faces huge disparities in income, assets and access to services. Poverty is widespread and inequality that can be traced back to the colonial times remains high, with the distribution of income and land skewed in favor of white minorities. Limited access to productive assets, particularly land, during the colonial times increased the vulnerability of poor households and more than half of all Namibians were classified as poor or very poor. The extreme dualism also extends to the provision of services and access to the labor markets. Prospects of receiving good education and essential health care were very limited for the non-white population. As a result of these limited opportunities for education and health care, Namibia found itself with a huge skills deficit at independence, which has impacted its growth prospects and will take concerted effort and time to overcome. The lack of access to credit, technical and managerial services have also constrained self employment opportunities outside of farming. A number of policies and programs have been adopted since Independence aimed at addressing Namibia’s development challenges, but results have not been forthcoming. iv. Most of the discriminatory policies and practices in the labor market that existed during the colonial period have been removed. Deliberate efforts of the Government and people of Namibia, through carefully planned and executed strategies of the Transitional Development Plan (TNDP), and the National Development Plans (NDP) brought about more accessible and widely utilized education, health, housing, water resources and other social services, which were previously only restricted to a minority of Namibians. However, the issue of land distribution and ownership has not been addressed to a significant extent. Not only has the re-distribution of land been slow (only 5 million hectares have been re-distributed so far out of a total of 36 million hectares), the criteria for selection of beneficiaries has been unclear and complicated. While support through the Affirmative Action Loan Scheme is provided to buy the farms, lack of farming skills and shortage of capital has resulted in reduced productivity. Further, there are concerns that though the number of policy objectives has increased; there has been a lack of prioritization of policies. Concerns have also been raised on how various policies are related towards achieving a common goal. With limited capacity for implementation and ix monitoring, even well meaning policies, for example in the areas of land reform or education, have not resulted in satisfactory outcomes. While growth has been modest, it has been volatile. v. Growth has been modest, though somewhat volatile since Independence, averaging 4.3 percent per annum, and sufficient to increase per capita income in most years. Much of the recent volatility can be traced to spurts in diamond production in 2004 and 2006. Overall, the economy is dominated by the service sector, public and private which accounts for around 60 percent of overall output1 and for much of its growth (Figure 1). The mining sector’s share in the Gross Domestic Product (GDP) peaked at 14 percent in 2002 and has averaged about 9 percent since then.2 Commencement of production at the Skorpion zinc mine in 2004 largely explains the strong growth in mining. The share of secondary sectors, in particular manufacturing, has remained virtually unchanged, and its contribution to growth is modest. Efforts to diversify the economy have not been successful3. Figure 0.1:Sources of Growth 8.0 6.0 4.0 2.0 0.0 -2.0 2001 2002 2003 2004 2005 2006 Mining and Quarrying Agriculture and Fishing Industry Services Source: National Accounts and Staff calculations And, growth has not been accompanied by a commensurate increase in employment. vi. Employment is estimated to have declined between 1997 and 2004. Young workers in particular are at a greater risk of unemployment, suggesting an inflexible labor market which is unable to provide economic opportunity for young labor market entrants. Labor force participation rates have been declining as well. 1 Within services, trade, transport and finance account for around half of sectoral output. 2 Namibia is a primary source of gem-quality diamonds in the world, is the fourth-largest exporter of non-fuel minerals in Africa, and the world’s fifth-largest producer of uranium. 3 Some diversification since independence, although not so much at the macro level, is reflected in the grapes, horticulture, tourism, dairy and mineral processing playing a more prominent role. x There have been substantial shifts in sectoral employment shares while output growth has kept its upward trend and sectoral growth contributions to GDP have remained largely unchanged. vii. Total employment in Namibia fell by approximately 15 thousand from 1997 to 2004, while employment in agriculture fell by approximately 42 thousand over the same period from about 37 percent in 1997 to 27 percent in 2004. Despite some employment generation in other sectors, the economy was unable to absorb the corresponding amount of labor shed from agriculture, not to mention the net growth in the working-age population. As labor resources are being reshuffled away from traditional agricultural uses, the service sector (including government) is being able to absorb some workers. Nonetheless, extensive reduction in labor force participation has indicated inability of the economy to use the freed-up labor in alternative market activities. The services sector accounts for the major share of employment, rising from about 39 percent in 1997 to over 55 percent in 2004. Producers of government services, accounting for about 20 percent of total employment in 2004, while remaining a main driver of employment, have been trending down. Some private sector services like wholesale and retail trade have been trending upwards, while others like real estate have been on a decline, reflecting a substantial variation in job creation and job destruction in the private sector. The secondary industries account for the smallest share of employment at about 13 percent in 2004 and its share has remained broadly constant. Agriculture displays the lowest labor productivity level amongst all sectors and reallocation of labor to any other sector results in an improvement in aggregate labor productivity. viii. However, these gains in labor productivity are not reflective of allocational efficiency. Gains in employment are not happening in the most productive sectors. As an example, wholesale and retail trade had a positive growth in value added and a strong increase in employment, reflecting an output elasticity of employment greater than one. At the same time, labor productivity growth was negative in the sector. While, the sector has the potential to absorb some of the low skilled workers typically employed in the agricultural jobs in the short run, success in reaping the benefits of sectoral rebalancing can only come from moving up the value chain. Growth accounting also suggests an improved aggregate productivity performance in 2000-04 vis-à-vis 1997-2000, but the results should be viewed with caution. ix. The period was characterized by an economy-wide reduction in the labor force participation rate. The reduction in labor force participation commands negative labor contribution to output growth as fewer workers are engaged in production. If output does not contract and capital input is stable (as was the case here), the result is an increase in total factor productivity. Analysis of labor productivity and employment dynamics at the sectoral level confirms that the economy is reshuffling resources to higher-productivity activities, but there is no indication that labor absorption is generating spillover effects necessary to move the economy up in the production value chain. If the reallocation process fails to accomplish that, moving labor resources will deliver a one-shot gain with limited impact over long-term economic growth and inequality. xi Employment generation in expanding sectors remains a significant challenge. x. Namibia has demonstrated potential to create jobs across different sectors as agriculture shed labor. However, it has not done so in enough quantity. Indeed, not only unemployment rates increased, but also labor force participation rates experienced a substantial drop from 53.5 percent (1997) to 47.9 percent (2004). Labor market mismatches between skills demanded by employers and prevalent skills available in the working-age population create serious impediments to the efficient absorption of freed-up agricultural labor and harm prospects of a productivity-enhancing reallocation. Labor market regulations also contribute to this state of affairs as hiring and firing decisions from employers are made unresponsive to economic conditions. There is a clear regional dimension to growth and development challenges in Namibia. xi. Employment growth rates across regions are widely heterogeneous, pointing to the need to tailor region-specific strategies for growth and development. A particular concern is that young workers are migrating to cities and engaging in casual labor rather than investing in their human capital accumulation, which contributes to deepen labor market segmentation and reduce prospects for sustained growth. In addition to migration, HIV/AIDS also contribute to rural population decline. Widespread lack of opportunity in rural regions reinforces disorderly internal migration and must be addressed. The shift in sectoral employment has also produced gender related implications in Namibia. xii. Labor force participation declines have been stronger among women and migration from rural to urban areas has been predominantly male. Both create conditions for gender imbalances, which should be monitored and addressed by the government. What options for increasing employment? xiii. Further increase in public sector employment is not a sustainable option. The secondary industries, currently accounting for the smallest share of GDP but relatively rapid growth provide an avenue for absorbing the unskilled and low skilled workers. Government has clearly a role to play in supporting productivity-enhancing labor reallocation, but policy decisions will only deliver sustainable pro-poor growth if they correctly identify and address leading market failures as well as government interventions to address them. So what are the binding constraints to achieving productivity enhancing and employment creating output growth? xiv. The growth diagnostics analysis undertaken in this study has helped narrow down the main areas where policy interventions should generate quick wins to create broad- based employment generating growth. Through the analysis two main sets of binding constraints have been identified: the first relates to human capital underdevelopment and labor market rigidity, while the second relates to lack of export diversification resulting from anti-export bias, tariff preferences and market access. xv. Human capital. On the supply side, there are problems associated with the quality of the Namibian labor force. Inefficiency and poor quality of the education and training system; with poor outcomes from the general education system, has resulted in a widespread skills deficiency among the Namibian labor force. There is an excess supply xii of untrained and low skilled laborers. Rates of return to education in Namibia also reflect a severe scarcity of skilled labor. The returns to primary and to incomplete secondary education are extremely low. The returns to secondary and post secondary education are very high. The shortage of skills is also translated in wide wage disparities in the labor market. Imbalances in the skills demanded by employers and those supplied by new entrants into the market result in structural unemployment. Shortage of skilled labor limits the capacity to apply knowledge and technology in production, constrains productivity growth, reduces profitability and investment returns, encourages capital outflows and hampers Namibia’s international competitiveness. xvi. Response: To address this constraint, public policy measures that are targeted at reducing the number of unskilled workers, including education reforms that improve access and completion rates for secondary, tertiary and vocational education should be deepened. Namibia needs to expand access to and improve the quality and relevance of education, particularly at the post-secondary level. The quality and efficiency of education at the primary level also needs to be improved. While the main constraints arise from lack of skills – a result of poor quality and inadequate access to senior secondary and tertiary education; excluding primary education from any reform process would lower the returns on reforms aimed at strengthening the quality of higher education. It is very likely that poor primary schooling has a snowball effect all along the educational system and therefore needs to be considered in any policy recommendation. In this regard, successful implementation of the Government’s 15 year strategic plan to improve education and training (the Strategic plan for the Education and Training Sector Improvement Program) could go a long way in addressing this binding constraint. xvii. Labor market rigidities. Labor markets in Namibia are characterized by a severe segmentation where the gap between those in high-productivity, high-pay jobs and those in precarious low-productivity, low-pay jobs is almost exclusively explained by supply- side factors (formal skills, training, work ethics, and cognitive skills). While Doing Business indicators are favorable, problems relate to the persistence of abrasive labor relations. The abrasiveness in labor relations is seen as an important contributor to hysteresis in the labor market. With regard to the impact of labor market legislation on labor market outcomes, the most apparent problems are related to the burden associated with retrenching labor, the difficulties to hire part time labor and expatriate workers, and the ineffective conflict resolution system which is still in place. As a consequence of these shortcomings, employers prefer to keep a smaller and more stable set of employees that does not change much either during a period of economic expansion or in periods of economic contraction, thus contributing to the creation of significant rigidity in the Namibian labor market and persistence in unemployment. xviii. Response: On the institutional side, a review of and adjustment the labor legislation is required. Labor relations in Namibia are perceived as abrasive by both employers and employees. Most of the contention seems to be focused on the lack of flexibility to fire and hire temporary labor (including expatriates) and in the current set up of the conflict resolution system. Labor legislation should be flexible enough to accommodate swings in economic activity and avoid capture of employment opportunities by insiders. xix. Consideration should be given to the adoption of a two-pronged approach to deepen labor market reform in Namibia. The first prong of the reform would actually be a xiii preparatory step whereby the high costs of bad labor market policies should be documented through good data collection, analysis, and dissemination. The second prong would follow with the launching of an integrated package of measures to enhance flexibility and feasible protective mechanisms. A cross-cutting issue that should deserve renewed efforts is the quality of education that needs to improve to increase competitiveness of Namibian workers in the labor market. xx. The setting up of an unemployment insurance mechanism accompanied by further flexibility of labor laws seems to be warranted. Attempts to create more flexibility in the labor market have actually failed in the past, in part because of a legitimate need to fight a legacy of abuses from the era of apartheid, but in part because those currently protected see themselves as having much more to lose from reform than to gain from such a reduction in protection. And if they are also politically influential, represented by unions and with political voice, their power to block reforms may be an insurmountable barrier. To be successful, the Government should aim at measures that can increase flexibility by lowering the restrictions and costs of firing workers accompanied by the setting up of unemployment insurance mechanisms, for example. The modality and viability of an unemployment insurance mechanism needs to be studied and developed. xxi. Diversification into higher value-added, non-traditional exports (Chapter 5) would provide opportunities for job creation in more labor intensive sectors. This will also contribute to mitigating the potential future problem of declining and volatile prices for Namibia’s mining products. Jobs created in the agriculture and manufacturing sectors provide the opportunity to use the large number of low skilled and unskilled labor available, while the formal skills development to meet the needs of the tertiary sector and high end manufacturing is being undertaken. xxii. Structure of the common external tariff (CET). Historically, the CET has been set to promote South African industry. Over time, the tariff regime has become restrictive for extra-SACU imports and has hindered the competitiveness of Namibian firms. The cascading CET has led to high effective rates of protection. Further, there are barriers to intra-SACU trade. While the SACU Agreement permits national protection for infant industries in the BLNS countries only,4 and a Competition Commission (CC) has been established to oversee and intervene when necessary, the CC is not functioning adequately as yet. As a result, discretionary use of regulations and product standards has stifled intra-SACU trade. xxiii. Tariff preferences. The structure of Namibia’s exports has become dependent on tariff preferences. And opportunities to export new products to new markets have become limited due to slow progress in multilateral trade negotiations. xxiv. Response. The limited export diversification in Namibia presents opportunities for growth through the introduction and expansion of new activities in the agriculture, 4 Under the provisions for this, the BLNS countries can impose import duties on imports from South Africa provided that the same tariffs are also imposed on imports from the rest of the world. An infant industry is defined in SACU as an activity that has not been located in the BLNS countries for more than 8 years and the protection is also limited to 8 years. Namibia has used the provision to protect a pasta manufacturer, UHT milk production and broilers (WTO, 2003a). The tariffs were set at 10 percent for three years, 7 percent for three years and 4 percent for two years for UHT milk; 40 percent for four years, 30 percent for two years and 20 percent for two years for pasta; and, 46 percent additional tariff for four years, 30 percent for two years and 20 percent for two years for broilers. xiv fisheries, manufacturing, and tourism sectors. In order to facilitate this, trade reforms would play a significant role in stimulating diversification and creating an environment conducive for increased investment. Consequently policies should be adopted that aim at deepening trade liberalization efforts in the context of SADC to improve market access for Namibia’s exporters, particularly in non-SACU markets. Reducing the complexity of SACU’s common external tariff and removing import authorizations and seasonal bans on agricultural products such as maize, maize meal, wheat and wheat flour would raise productivity and improve both competition and food security. However, reducing the common external tariff would also risk diminishing the size of the common revenue pool. Consequently, future analytical work should identify the impacts of trade reform on Government revenues and present options for sequencing trade reform to mitigate any losses by, for example, investigating measures to broaden the tax base, moving from the current reliance on consumption taxes to one in which income taxes have a greater share. xxv. Market access for livestock – the Veterinary Cordon Fence (VCF). Apart from the above access issues related to the trade preferences, there is a self imposed market access division in the livestock sector in Namibia. The veterinary status of the Southern part of Namibia (i.e, FMD and CBPP free) means that any meat product entering the disease free area must be quarantined. This has resulted in a significant increase in the costs and loss of quality of livestock. Considering that more than half of the national cattle herd is situated in the non-disease free area, addressing the VCF issue has the potential to increase livestock exports and create more jobs and incomes. xxvi. Response: Raising the veterinary status of the area currently north of the existing VCF to the level that pertains to the South of the fence would allow enhanced market access. xxvii. In addition to the above, the lack of entrepreneurship has often been cited as a fundamental reason for the lack of risk taking and engaging in business activities that can lead to better livelihoods. This can be traced back to a large extent on the lack of opportunities – particularly education – and restrictions on activities that can be undertaken by the indigenous black population during the colonial times. The Namibian Government’s pursuit of policies since Independence to improve these opportunities has the potential to make an impact on increasing employment and growth. How has growth, productivity and employment dynamics impacted on poverty and inequality? xxviii. Poverty and inequality, while showing declining trends, remain high. About 28 percent of households are classified as poor and 4 percent of households fit the definition of extremely poor in 2003/045. About 52 percent of the households and 60 percent of the population lives in the predominantly rural northern regions and these regions show a high percentage of poor and extremely poor households, suggesting a rural feature to poverty in Namibia. Namibia has one of the highest income inequalities in the world with a Gini coefficient of about 0.6. The top 20 percent of the population accounts for 63 percent of total expenditures. The lowest quintile accounts for only 3 percent of consumption expenditure. 5 The poverty measure is defined in terms of household food consumption. xv xxix. Rural households are becoming increasingly vulnerable as productive bodies are attracted to urban centers where opportunities for wage employment are higher. Largely rural regions have more female-headed households and female-headed households are more vulnerable to poverty than male-headed households. The bias against female-headed households is also reflected in wage differentials between men and women, with men earning on average 34 percent more than women. Moreover, at the national level, a slightly higher share of female-headed households has no formal education than male-headed households and school attendance carries a premium of 67 percent for males and 38 percent for females in terms of wages earned. xxx. Education and health facilities appear relatively accessible in Namibia. However, the quality is an issue as reflected in the huge skills mismatch affecting productive rebalancing of employment shares. The share of education and health expenditure of private households continues to be relatively low and the distances to these facilities appear manageable. There seems to be significant improvement in access to water. Yet, there is perhaps a need to focus on access to water for productive activities, which can allow households to evolve out of poverty and reduce migration from rural areas. There is need to intensify efforts to make electricity accessible, which will facilitate economic activities in rural areas. The provision of electricity as a source of energy lags behind. xxxi. While the Gini-coefficient declined from 0.7 in 1993/4 to 0.6 in 2003/4, it remains very high and the levels of vulnerability remain significant. The decline indicates the inclusion in the country’s economic activities of the previously disadvantaged. Prior to independence in 1990, the majority of Namibians were constrained to a few low-income economic activities. Further, it reflects the favorable political environment, which provides a stable and consistent economic environment. Other factors include an expansion of the safety net coverage as reflected in public schemes like the old age pension and grants for the orphan and vulnerable children; an increase of the income tax threshold which increases the disposable income, particularly of the low income group; a significant increase in the production and consumption of Mahangu (a main food item in Namibia) at the time of the 2003/04 NHIES as compared to 1993/94 which was a drought year; and an increase in the internal transfer of money from the urban to the rural sectors. xxxii. The threat posed by HIV/AIDS is real and its impact is being felt already. It is estimated that the HIV prevalence rate for people aged 15-49 years was 19.6 in 2005 and the incidence of tuberculosis was 767 per 100,000 people in 2006. In the light of constraints identified, do the important sectors of agriculture, fisheries and manufacturing hold any potential for poverty reducing growth? xxxiii. In agriculture, Namibia’s key constraint – and key opportunity – is in the meat export trade, and relates to the Veterinary Cordon Fence which defines the line between the disease-free south and the possibly diseased north of the country. For decades the government’s intention has been to extend the VCF northwards but so far very little progress has been made. Yet the difficulties are not insurmountable and the benefit-cost ratio is high: the main beneficiaries would be smallholders, and exports would increase. xxxiv. Other opportunities in agriculture are in horticulture. Among these are products like table grapes in which Namibia has a natural timing advantage in that it can xvi harvest earlier in the season than its competitors, providing it with price advantages in its main export markets. The government and donors can play a key role to support the sector by taking steps to improve the business environment (e.g. facilitating compliance with strict sanitary and phytosanitary measures required for the US market; addressing the shortage of regular shipping lines between the US and Namibia), assisting knowledge and technical transfer and promoting marketing information. xxxv. In fisheries, given the country’s depleted stocks, there is little prospect for increases in output in the short term. Restrictions through quotas on various fish to protect the fish stock and ensure long term sustainability in the sector and a closed season on hake have led to 80 vessels being laid up in port. In manufacturing, opportunities for diversification stem from links to agriculture and fisheries, i.e. agro-processing and fish processing, e.g. net making, processing of hake, leather products and processing of Karakul pelts. The challenge for Namibia will be to review and revise, as necessary, within SACU framework, its external tariff structure to enhance competitiveness of its manufacturing industries. Also, Namibia will need to negotiate with SACU members to reduce intra-SACU barriers to its exports. Key Recommendations and the Way Forward xxxvi. It is proposed that the findings of this analytical work and the key recommendations noted below be shared widely with stakeholders in Namibia, including the Cabinet that directed this study to be undertaken. • Continue implementation of the Education and Training Sector Improvement Program to meaningfully address the skills shortage. • Undertake in-depth analysis on the demand for skilled workers in the different growth sectors. • Deepen labor market reform through: (i) review of the labor legislation with a view to ensure flexibility in the labor market to respond to swings in economic activity; (ii) assessment of the importance of labor unions in influencing labor market outcomes in Namibia and examination of the importance of sector affiliation in labor market outcomes in Namibia; (ii) examining the options for setting up an unemployment insurance scheme based on international experience. • Examine and review the CET structure within the SACU framework with a view to (i) identify the sectors where competitiveness is compromised because of high tariffs; (ii) identify sectors where Namibia could potentially benefit from the current tariff regime; (iii) examine the impact of trade reforms on Government revenues and options for sequencing trade reforms to mitigate potential revenue losses. • Enhance market access for livestock by taking measures to eliminate the VCF. This may require further studies on the impact of the current initiatives on easing the restrictions on trade across the VCF and necessary actions that will need to be taken to open the VCF border. • Prepare and implement an action plan to strengthen statistical systems to improve the quality of information for decision making. xvii • Undertake further analytical work to deepen the understanding on poverty and distribution issues and to examine the pay-offs and trade-offs of the different Government policies on growth and distribution based on in-depth data from the 2003/04 Namibia Household Income and Expenditure Survey (NHIES) and the 2004 Labor Force Survey. xviii Country Background I. INTRODUCTION 1.1 Namibia is situated in the southwestern corner of Africa and is bordered by the Atlantic Ocean to the west, South Africa to the south and Botswana to the east. In the North, the country is bordered by Angola, Zambia and Zimbabwe. A large part of Namibia is classified as desert. All along the coastline one finds the Namib Desert, which stretches about 50 to 100 km inland. In the Southeast of the country lies the Kalahari Desert, which extends into Botswana. 1.2 With a population of less than two million people and an area of some 824,000 square kilometers, Namibia has a low population density compared to most countries in Africa. This is mainly due to the fact that a large part of the country is too dry for human settlement, with generally low and highly variable rainfall. While there are on average only about 2 persons per square kilometer, the population is not spread evenly across the country. The majority of the population (60 percent) lives in the north and northeast of the country. Namibia is predominantly rural, with about 33 percent of the population living in urban areas. 1.3 Since Independence in 1990, Namibia has broadly been socially and politically stable. Multi-party democracy has taken firm roots in the country. The country has successfully held three free and fair Presidential and Parliamentary elections. During the first decade of Independence, Namibia’s overall development strategy focused on four medium and long-term goals: (i) revive and sustain economic growth; (ii) create employment opportunities; (iii) reduce inequalities in income distribution; and (iv) reduce poverty. The first 10 years of Independence have also seen significant transformation of the social fabric of the country. Deliberate efforts of the Government and people of Namibia, through carefully planned and executed strategies of the Transitional Development Plan (TNDP), and the first National Development Plan (NDP) brought about more accessible and widely utilized education, health, housing, water resources and other social services, which were previously only restricted to a minority of Namibians. 1.4 Efforts to transform the social and economic status of Namibians were deepened with the adoption of Vision 2030. Namibia’s Vision 2030 is anchored on three mutually reinforcing pillars: (i) quality of life of its people; (ii) sustainable utilization of the country’s resources; and (iii) creating an enabling environment for peace and stability. Policies underpinning the NDP2 and NDP3 fit well with the medium term objectives of this Vision. Key among them are to revive and sustain economic growth; create more employment opportunities; reduce inequalities in income distribution; reduce poverty; reduce regional development inequalities; promote gender equality and equity; promote economic empowerment; and combat the further spread of HIV/AIDS. II. OBJECTIVES OF THE CER 1.5 This Country Economic Report (CER) is a contribution to the ongoing debate among decision makers and diverse stakeholders in Namibia on the outlook for sustained growth and employment creation that addresses distribution issues as well. As noted above, Namibia has enjoyed political and economic stability since Independence, deepened its democratic institutions, and adopted a wide array of reforms and policies to stimulate growth, 1 create employment and reduce inequality. However, growth has been volatile, unemployment is high and income inequality remains one of the highest in the world. 1.6 Key elements of such a debate are a clear understanding of the past record of growth and distribution, the main constraints to growth, identifying the key players and potential policy adjustments that may be needed to address the constraints and examining the pay-offs of the different actions in terms of growth, inequality and poverty reduction. In response, this report addresses the following main questions. • What has been the past growth and employment record and what can be learnt? • What are the main binding constraints to growth? • What has been the impact of this growth on poverty and inequality in Namibia? • What are the prospects for broad-based growth in key sectors? • What key elements of an employment strategy would complement a growth strategy? III. LEGACY OF COLONIAL RULE – A DUAL ECONOMY 1.7 The colonial rule in Namibia was violent and it left the legacy of a dual economy. At independence, Namibia had a relatively well functioning physical infrastructure, a strong institutional foundation for market development, sound economic policies and a reasonably well- organized apparatus for public administration. The private sector played a dominant role in key productive sectors – mining, agriculture and fishing. The transportation network of roads, railways, airports and harbors were also reasonably well developed. Per capita income of about US$ 1,770 was among the highest in sub-Saharan Africa. However, Namibia also inherited a huge financial, social and environmental debt6 – all of which have had a significant impact on the country’s development. 1.8 The legacy of the colonial rule is a population facing huge disparities in income, assets, participation in the labor market and access to services7. While the financial debt was written off after negotiations between Namibia and South Africa, Namibia is still suffering from the burden imposed by the social and environmental debt. The disruption of traditional life under colonial rule hampered traditional forms of agriculture and pastoral livelihoods and it hampered a successful transformation of the sector into the mainstream economy. The apartheid policies followed under the colonial rule skewed the development objectives in favor of the ruling class. 1.9 Poverty is widespread and inequality can be traced back to the colonial times. Namibia’s per capita income at independence was almost four times the average for sub-Saharan Africa and about the average of world-wide middle income countries. But, distribution was highly skewed, with a Gini coefficient estimated to be 0.67 according to the 1993/94 Namibia Household Income and Expenditure Survey (NHIES). About 40 percent of the households (accounting for about 50 percent of the population) were classified as poor based on criteria related to income spent on food. 6 Namibia Vision 2030 – Chapter 2. 7 A detailed exposition is provided in a Background Paper available on request. 2 Box 1.1: Colonial History and the Path to Independence The colonial period in Namibia was a violent one. German colonists gained control of land, mineral and other resources. German colonial power was consolidated, and prime grazing land passed to white control as a result of the Herero and Nama wars of 1904-08. German administration ended during World War I following South African occupation in 1915. On December 17, 1920, South Africa undertook administration and legislation of South West Africa. Upon rejecting the UN requests to place the territory under a trusteeship agreement, in 1966, the UN General Assembly revoked South Africa’s mandate. In 1966, the South West Africa People’s Organization (SWAPO) began its armed struggle to liberate Namibia, in part from bases abroad. After Angola became independent in 1975, SWAPO established bases in the southern part of that country. Hostilities intensified over the years, particularly in the north of Namibia. SWAPO adopted guerrilla tactics at the same time, but the organization’s failure to establish an internal government in Namibia made it easy for South Africa to assert control. South Africa refused to negotiate on a UN-supervised program for Namibian independence unless an estimated 19,000 Cuban troops were removed from neighboring Angola. In response, SWAPO intensified its guerrilla activities, severely restricting movement in the north of the country. A UN-sponsored deal ensured Cuban troops left Angola if South African troops exited Namibia. UN-monitored elections were held in November 1989 and SWAPO won a clear majority of the votes. A constitution was adopted in February 1990 and independence granted the following month under the presidency of SWAPO leader Sam Nujoma. 1.10 Colonial policies supporting separate development led to the emergence of a highly dualistic society in Namibia limiting income earning opportunities as well as human development outcomes. Most well paid jobs were reserved for white people. The white minority, about five percent of the population, along with a small black elite, another one percent, had average annual per capita income of US$16,500, while another 39 percent of the population (blacks who worked in the modern sector), had annual per capita income of US$750. The rest of the population had an annual per capita income of US$85. The inequality was also manifested in consumption levels, with the richest one percent of households consuming the same amount as the poorest 50 percent8. IV. POST INDEPENDENCE RESPONSE 1.11 The Government recognizes that given the country’s endowment, Namibia has the opportunity for growth. A diversity of natural resources, sound infrastructure, an extensive network of regional and global market access, an adequate and affordable supply of energy9 and attractive incentives provide a good basis for industrialization. However, it needs to break the barriers to economies of scale imposed on local manufacturers and professional service providers by the smallness of the domestic market (NDP2). There is a general recognition that this can be facilitated by adopting and pursuing more competitive and export oriented policies. 8 Government of Namibia - Second National Development Plan. 9 The supply of energy has become a concern in recent months with the supply from South Africa being affected by shortages in South Africa and high global oil prices. 3 1.12 The Government also recognizes the need to address past inequalities. In order to achieve broad based, sustainable growth, new growth sources must be productivity enhancing and labor-absorbing; and public policy has to be pro-active. 1.13 Within its NDP framework, Government formulated a National Poverty Reduction Action Program (NPRAP) to elaborate on its Poverty Reduction Strategy. The NPRAP is a co-operative expression of all relevant Government Ministries and Non-state actors. It demonstrates the holistic and synergistic response of the government to the social and economic requirements of effective and measurable poverty reduction. In addition, GRN conducted Participatory Poverty Assessments (PPAs) in Ohangwena, Omaheke and Caprivi regions. GRN intends to replicate these studies in the remaining Regions. The aim is to include the views of poor and marginalized people into the formulation of poverty reduction strategies and the identification of poverty reduction programs or projects, which will be included in the Region’s planning and budget framework. Other measures to address poverty include strengthening grant- based transfer programs. This includes a basic social pension program, a combined blind person and disability pension program and a child maintenance program. A Poverty Monitoring and Evaluation Strategy has also been adopted, although its implementation needs strengthening to ensure that lessons from the implementation of poverty programs are adequately reflected in future policy making. 1.14 GRN has adopted generally prudent macroeconomic policies to create a conducive environment for growth. At independence in 1990, GRN took over the management of an economy whose gross domestic product (GDP) and national income per capita, at constant 1990 prices, were N$6,081 million and N$4,520, respectively. The engines of growth of the economy were the tertiary industries, which over the preceding decade, accounted for about 46 percent of real value-added (at constant 1990 prices) each year, on average. Primary industries were the second most important group of industries, which accounted for 40 percent of real value-added each year, on average, over the same period. Secondary industries (manufacturing, electricity and water supply; and construction) accounted for 14 percent of real value-added. 1.15 Real GDP increased by 39 percent in the first decade after Independence. Tertiary industries further increased their share in GDP, to account for 55 percent of real value-added each year, on average, over the post-independence period, 1990 – 1999. The share of primary industries declined to 26 percent while that of secondary industries increased to 19 percent. Tertiary industries thus, established themselves very firmly in the post-independence period, as the main source of economic growth in Namibia. 1.16 The government has put in place a number of policy measures and programs, to encourage local and foreign investment in Namibia, with the view to diversifying productive activities and creating employment opportunities for its labor force. In May 1990, the government produced the first draft of policy statement on the Code on Foreign Investment, and established an Investment Centre under the Ministry of Trade and Industry, to coordinate the investment promotion activities of the government. Special incentives for manufacturers, in general, and exporters, in particular were introduced in 1996. Enterprises whose production activities were all for export were granted export processing zone (EPZ) status, which exempted them from paying corporate income tax, import duties on imported intermediate and capital goods, and sales tax, stamp and transfer duties on goods and services required for EPZ activities. 4 1.17 National Agricultural Policy was produced in 1995 to achieve growth and stability in farm incomes, generate employment and enhance food security. It aimed at creating and sustaining viable employment and general livelihood opportunities in rural areas; contributing to the improvement of the country’s balance of payments; promoting sustainable utilization of the country’s land and other natural resources; and establishing equitable rural, urban and regional development, based on the principle of comparative advantage. These agricultural objectives were to be realized through a mix of monetary and fiscal policy measures, including subsidies, where they could help achieve socio-economic objectives in the short term and periodically assessed. The Green Scheme, in line with Vision 2030 and NDP2, was adopted to encourage the development of irrigation based agronomic production in Namibia. It aims to increase the contribution of agriculture to the country’s Gross Domestic Product. 1.18 GRN’s Policy on Land Reform is a major endeavor to address inequality and poverty. The main objective of land reform in Namibia is to achieve an acceptable redistribution of land, improvement of material conditions of the poor peasants, the farm laborers and alleviating the plight of the landless Namibians. The Land Reform Advisory Commission was constituted as a legal requirement to advise the Ministry of Lands. The Commission is composed of different institutions such as the Namibia Agricultural Union, Namibian Farmers Union and others. The Lands Tribunal is also in place to serve as an arbitrator in cases where a disagreement arises. In 2003 the GRN with the support of donor agencies, created a Permanent Technical Team (PTT), comprised of individuals with a wide range of expertise. The PTT was mandated to review the existing legal and policy framework, economic sustainability of land reform, financial sustainability, institutional and environmental issues on resettlement programs. Their report with recommendations has been adopted by Cabinet. Since the land reform program started, the Government, through the Ministry of Lands and Resettlement, has acquired 157 farms in commercial areas. In its endeavor to demonstrate commitment to the land reform and resettlement program, the Government makes a budgetary provision of N$ 50 million annually (since 2003) for land purchase in commercial areas. Apart from acquiring land through willing seller willing buyer, a process that many regard as slow and ineffective, the Government has instructed the Ministry of Lands and Resettlement to put mechanisms in place for expropriation of land in the best interest of the State. This process is underway and it will be done within the provisions of the constitution of the Republic of Namibia and the existing Agricultural (Commercial) Land Reform Act of 1995. The implementation of this provision is carefully sought with proper and participatory consultation. In accordance with the law, and in the spirit of national reconciliation and nation building, expropriation of farmland will be done with fair compensation. It is believed that this is a strategy that will help to ameliorate and contribute positively towards a solution to resolve the land question in Namibia without provoking any form of violence. 1.19 GRN instituted a number of important sector policies to address inequity and to empower Namibians in the Fisheries and Mining sectors. This sector is one of Namibia’s main industries and a major source of foreign exchange earnings. Key interventions in the sector include: promotion of on-shore processing by including the introduction of on-shore processing incentives; Namibianization of the fishing industry by encouraging access to the sector by Namibian nationals, especially those who were previously socially, economically and educationally disadvantaged. In 1994, in terms of an accord reached between the GRN and De Beers Centenary AG, Consolidated Diamond Mines (CDM) was reconstituted as NAMDEB Diamond Mining Corporation (PTY) Ltd in an equal partnership. Furthermore, De Beers Marine Namibia was formed in 2000 as a joint partnership between the Namibian Government, De Beers and NAMDEB. Another major milestone and first for Namibia was the establishment of 5 Namgem, the diamond-cutting and polishing factory outside Okahandja. A wholly owned subsidiary of Namdeb, Namgem is rated as one of the most technically advanced factories in Africa. A number of cutting and polishing plants have been established in the country providing employment to upwards of 1,000 workers. 1.20 GRN adopted a Decentralization Policy to achieve more equitable delivery of services and to fast track rural development in Namibia, which had been neglected in the past. The Decentralization Policy has been adopted to enhance and guarantee democratic participation of people at the grass-root levels in order to achieve sustainable democratic development. The vision of political leadership in Namibia is that Decentralization is an instrument the state can use to bring about democratic participation to people at lower levels of government. The theme of Decentralization Policy in Namibia is therefore “Decentralization, Development and Democracy. A Trust Fund for Regional Development and Equity Provision has been established to provide funding for technical assistance, guidance and training in the identification, planning, preparation, appraisal, monitoring, evaluation, financing, implementation or management of developmental projects and the formulation of specific projects, needs or proposals in regions or local authorities. 1.21 The Education Sector remains a key priority for Government. Since Independence, there has been great progress in making education free and accessible for all. Namibia is among the eight countries in the world that spend the highest share of GDP on public expenditure in education. However, the quality of education has been poor. The Education and Training Sector Improvement Program(ETSIP) has been developed by the Government in collaboration with its development partners to be implemented over 15 years. Its key objective is to substantially enhance the Sector’s contribution to the attainment of strategic national development goals and to facilitate the transition to knowledge based economy. In the immediate future, it will improve the quality, range and threshold of skilled labor required to improve knowledge-driven productivity growth, and thus contribute to economic growth. 1.22 To improve service provision and management in the health sector, authority has been devolved to Regional Management Teams in the Ministry. A total of 34 health districts have been created to coordinate community health services, clinics, health centers and district hospitals. Thirteen regional Health Directorates support the 34 Districts. At the national level, programs have been organized into functional units: policy, planning and human resource development, tertiary health care and clinical support services, primary health care services, developmental social welfare services, and finance and resource management. Major Programs being implemented include: National Malaria Control Program; National Aids Coordination Program (NAPCOD), National Nutrition Program, Sanitation Program. 1.23 Namibia, no doubt has numerous good policies in place. The major concern has however been that while the number of policy objectives have increased, there has been a lack of prioritization of policies. Concerns have also been raised on how various policies are related towards achieving a common goal. In some cases, the policy touches on relevant issues but it remains silent on how objectives will be achieved (for example, the White Paper on Fisheries identifies value-added processing of fish as one of the strategies, but remains silent on how this could be achieved). In other instances, links between different sectoral policies are not recognized, limiting the achievement of overall results (for example, the insufficient focus on energy as an input to industrial production in the Energy White Paper of 1998). Some times there is a lack of awareness among relevant stakeholders about the existence of policies (this was evident from a survey conducted as part of the review process and preparation of a new Industrial 6 Policy, where many of the respondents were not aware of the existing policy). With limited capacity for implementation and monitoring, even well meaning policies, for example in the areas of education and land reform, have not resulted in satisfactory outcomes. 1.24 As a result, response to many of the policy incentives has been limited. Unemployment remains high. The economy still remains heavily dependent upon tertiary and primary industries. There has been no significant response by manufacturing industries to the policy incentives, and the people of Namibia have continued to consume products manufactured mainly in South Africa. The decentralization process is moving at a slow pace to improve service delivery. Growth and Employment Record I. INTRODUCTION 2.1 The Namibian economy has displayed high potential for economic growth over the last 25 years, but inequality and poverty challenges remain substantial. Since 1981, Namibia has been able to produce a satisfactory growth record in comparison to other sub-Saharan countries. Albeit somewhat modestly, real GDP growth rates have been trending up in a consistent manner, suggesting a positive outlook for the economy (Figure 2.1). GDP per capita growth has also broadly followed the pattern observed for Sub-Saharan Africa, moving into positive territory from the mid-nineties onwards. Namibia has enjoyed political stability since independence and it is currently classified as a middle-income country. The country is rich in mineral resources, has good transport infrastructure, and enjoys a strategic location along the Atlantic ocean with access to deep-water ports. In contrast, Namibia ranks poorly in human development (125th out of 177 countries surveyed in 2006 Human Development Report) and inequality is among the highest in the world, in a clear demonstration that economic growth has not trickled down to the poor. Figure 0.1: Real GDP Growth 10 8 6 4 % 2 0 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 -2 -4 Sub-Saharan Africa Namibia Linear (Namibia) Source: WDI 2.2 Sectoral output shares have remained broadly constant since 1995, despite variations in sectoral growth rates. As shown in Figure 2.2, the Service sector has been the 7 main contributor to Namibia’s GDP for some time and, since 1995, its contribution has stabilized at around 60 percent of the GDP. The Industry sector comes in second place with a contribution of approximately 30 percent since 1995 and Agriculture displays the smallest participation in GDP with an average 11 percent share since 1980.10 The Agriculture sector presents highly volatile growth rates (Figure 2.3) due to regional and local droughts. The Industry sector also displays significant volatility, while the Service sector presents a more stable growth rate.. Figure 0.2: Sectoral Output Shares Value-added % of GDP Sectoral Output Shares 70 60 50 40 30 20 10 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 0 Agriculture Industry Services Source : WDI Figure 0.3: Sectoral Output Growth Rates p 20.00 15.00 10.00 5.00 % 0.00 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 -5.00 -10.00 -15.00 Agriculture Industry Services Source : WDI 2.3 Modest growth performance, significant human development challenges and stable sectoral output shares has played out against a background of substantial shifts in sectoral 10 Agriculture corresponds to ISIC divisions 1-5, which includes Agriculture, Hunting, Forestry and Fishing. Industry corresponds to ISIC divisions 10 – 45, which includes Mining & Quarrying, Manufacturing, Electricity, Gas & Water Supply, and Construction. Services corresponds to ISIC divisions 50 -99, which includes a long list of sub- sectors (among them: Wholesale & Retail, Hotels & Restaurants, Transport, Real State and the Public Sector). 8 employment composition. Data from different rounds of the Namibian Labor Force Survey (NLFS) confirm the extensive shedding of labor from Agriculture since 1997, both in relative as well as in absolute terms. As indicated in Table 2.1, agricultural employment share fell from 37 percent in 1997 to 27 percent in 2004. The 40 thousand plus lost jobs in Agriculture between 1997 to 2004 amount to almost 9 percent of the 2004 labor force and should be viewed in a context of growing working-age population. Altogether, these facts reflect a meaningful structural transformation of the economy as the reshuffling of labor away from traditional agricultural uses has deep cultural, social and economic implications.11 Table 2.1: Agriculture Share of Employment and Labor Force 1997 2000 2004 Employment in 146899 126459 102636 Agriculture Total employment 401203 431850 385329 Labor force 498325 541448 493449 Source: NLFS 2.4 Namibia faces the challenge of reallocating its labor resources in a productivity- enhancing manner as Agriculture absorbs fewer workers. The reduction in Namibian agricultural employment has been accommodated by three main factors: reduced labor force participation, increased economy-wide unemployment, and increased employment in other sectors. Clearly, the economy would have benefited the most if resources were quickly allocated to their highest value of use - that is, if labor shed from agriculture immediately had found its way to high productivity activities elsewhere in the economy. Unfortunately, this is not a frictionless process and it is reasonable to expect time-consuming adjustments typical of labor markets as the economy rebalances away from agriculture. In this context, institutions and government policies play a central role in (i) fostering the entrepreneurial spirit necessary for job creation, (ii) forging a skilled and adaptable labor force resilient to job destruction shocks and capable of escaping unemployment spells faster, and (iii) creating a well-functioning marketplace for trading labor services in which mutual profitable opportunities are identifiable and accessible to employers and employees. The Namibian performance of the last decade (and, most importantly, the performance yet to come) rests largely on its success in developing such a productivity-enhancing labor reallocation environment.12 II. OUTPUT PERFORMANCE AND LABOR DYNAMICS 2.5 Sectoral growth contribution has been reasonably aligned to the patterns observed in the neighboring economies. The service sector has been the major contributor to the Namibian economic growth, and its average growth contribution has been commensurate with South Africa and superior to other neighboring countries. This is an indication that the Namibian economy has been able to cope with significant shifts in sectoral employment shares without major disruptions in economic activity. While necessary, this is not sufficient to show that the economy is on track towards sustainable productivity growth. Later in the chapter we argue that 11 The reason for such a reduction in Namibia’s agriculture is not clear cut. Possible explanations are: (i) changes in communal farming as younger people prefer to try casual labor in cities than work in the farms and (ii) rainfall occurrence different in each year of the survey. Although there might exaggerations and distortions with the figure, anecdotal evidence suggest that the trend is correct. 12 See Caballero and Hammour (1998) for a detailed account about how institutional incentives, labor reallocation and long-term economic growth are closely related. 9 there are one-shot gains involved in reshuffling labor resources away from low productivity activities in Agriculture, and that a truly dynamic private sector (services included) capable of moving up the value chain is key for assuring sustained productivity growth. Although service growth contribution seems to be generally aligned with South Africa, there is still much to be done in terms creating an enabling environment to sustained growth. 2.6 Agriculture’s growth contribution has been weak and slightly negative at times, but its average performance has also been comparable to the ones of neighboring economies (though more volatile). Not only agricultural output share has remained constant throughout time (Figure 2.2), but also its contribution to GDP growth has been (on average) comparable to neighboring countries (Table 2.2) – although climatic conditions have caused stronger volatility in its contribution with strong drops in some years. Again, it is interesting to note that the fall in Agriculture jobs from 1997 to 2004 has not triggered sustained declines in its growth contribution during the same period. One of the explanations is that such declines were concentrated on very low productivity jobs. Table 2.2: Sectoral Contribution to Growth Source: WDI Various Years 2.7 As Agriculture shed workers, other sectors of the economy were able to absorb some labor resources and avoid major disruptions to economic activity. Employment in Public Administration, Education and Health grew by close to 20 thousand jobs, which corresponds to 4 percent of the 2004 labor force. Private sector services and Fishing grew modestly by 5 thousand jobs each (1 percent of the 2004 labor force).13 Manufacturing underwent a slight decrease of 2 thousand jobs. More importantly, as discussed in more details in the next sections, because agriculture productivity is quite low relative to other sectors of the economy, a big drop in agriculture jobs can be compensated in terms of output with a modest increase in non-agricultural jobs. Going forward, growth prospects for Namibia rely heavily on its ability to generate non- government jobs outside Agriculture and to promote within-sector productivity gains. This comes in tandem with the need to diversify Namibia’s sources of economic growth. 13 In this figure, Agriculture and Fishing have been separated to indicate different employment trends. Services (private) include market service activities only. 10 Figure 0.4: Employment in Key Sectors 160000 140000 120000 Employment 100000 80000 60000 40000 20000 0 1997 2000 2004 Agriculture Fishing Manufacturing Services (Private) Public Admin, Educ and Health Source: NLFS 2.8 Private sector services play a key role in employment creation in Namibia. While Figure 2.4 may suggest a weak and dormant role of private sector services in job creation from 1997 to 2004, a more disaggregate look at the data shows otherwise. Within the category of private sector services, there is substantial variation in terms of job creation and job destruction patterns. For instance, Wholesale & Retail alone has created 20 thousand jobs from 1997 to 2004, the same amount created by Public Administration, Education and Health. Hotels & restaurants also show up as an expressive employment gainer (though from a low base, the sector multiplied its 1997 size by four). On the other hand, some sub-sectors (Real State, Other Community Services and Private Household Services) did shed an expressive amount of labor cancelling off positive contributions. Therefore, net aggregate employment change is a misleading indicator of the role played by private sector services, as it understates the responsiveness of non-agricultural private activity in Namibia. 2.9 Namibia’s economy has the potential to diversify its sources of growth and absorb labor resources in different sectors of the economy. This is evident by examining the pattern of job destruction and creation in the economy. Job destruction and freeing-up of labor resources from Agriculture has been a key driver of labor flows for the entire 1997-2004 period. The data also suggests that Namibia’s economy was able to diversify its sources of job creation across sectors, particularly in the 2000-2004 period. From Figure 2.5, it is possible to identify four major groups of sectors according to their recent employment performance: (i) employment shedders from 1997 to 2000 and from 2000 to 2004 (shedder-shedder); (ii) employment gainers 11 from 1997 to 2000 and from 2000 to 2004 (gainer-gainer); (iii) employment shedders from 1997 to 2000 and gainers from 2000 to 2004 (shedder-gainer); and (iv) employment gainers from 1997 to 2000 and shedders from 2000 to 2004 (gainer-shedder). Figure 2.5 portrays such underlying dynamics alongside with the relative employment sizes of each sector in 2004 (proportional to the respective bubble areas in the graph). A couple of sectors in the lower-right quadrant displayed variation large enough to affect economy-wide job creation and destruction rates. Accounting for them, the following big picture emerges: as agriculture frees-up and refrains from absorbing labor resources, employment growth taking place elsewhere is broadly distributed across the economy with some sectors initially going through a contraction stage (shedder-gainer group in the upper-left quadrant), while others expand throughout the years (gainer-gainer group). Labor market segmentation and worker skill profiles are evidently crucial for understanding the impediments to this reallocation process, and they will be addressed in the employment section of the chapter, but a central message from the evidence presented below is that Namibia’s economy has the potential to diversify its sources of growth and absorb labor resources in different sectors of the economy. Figure 0.5: Employment Gainers and Shedders 12 80 SHEDDER-GAINER GAINER-GAINER Employment Growth Rate % (00-04) 40 0 -60 -40 -20 0 20 40 60 80 100 -40 -80 SHEDDER-SHEDDER GAINER-SHEDDER -120 -160 Employment Growth Rate % (97 - 00) Agriculture Fishing Mining and Quarrying Manufacturing Electricity, Gas & Water Supply Construction Wholesaleand Retail Trade, Repair of motor vehicles 160000 Hotels and Restaurants 140000 120000 100000 Transport, Storage and Communication 80000 60000 Financial intermediation 40000 20000 0 1 Real Estate, Renting and Business Activities Public Administration & Defence & Social Security Education Health and Social Work Other Community, Social & Personal Services Private households with employed persons Extra-Territorial Organisations & Bodies Not Reported Source: NLFS 2.10 Output performance of the Namibian economy relies on the interaction between the reallocation process (Figure 2.5) and the productivity dynamics of each sector. In a perfect world, labor would instantaneously flow in the direction of its highest value of use and we should observe bubble points in the upper-right corner of Figure 2.5 corresponding to high productivity sectors, while low-productivity sectors would be sitting in the bottom-left corner as big bubble points. Nevertheless, real world is plagued with imperfections. There are skills mismatches between demand and supply of labor, lack of entrepreneurial drive necessary for job creation, uncertainty about profitability of economic decisions, distortions from regulatory environment, nominal rigidities, just to name a few. As a result, positive effects from labor reallocation may take a while to kick in, if they do at all; this makes it particularly relevant to examine output dynamics through the lens of employment and productivity. 2.11 The Namibian economy has reshuffled labor resources across sectors in excess to what would be necessary to account for the net aggregate variation in employment between 13 1997 and 2004. The last row of Table 2.3 indicates that 18 percent and 22 percent of total employment in the economy was reshuffled across sectors in excess of what would be necessary to accommodate the observed net changes in employment for the periods 1997-2000 and 2000- 2004, respectively – alternatively, anything from 70 thousand to 90 thousand jobs (around 15 percent of the 2004 labor force) was either created or destroyed in excess to what would be required to match observed fluctuations in employment.14 Research has often interpreted such excess reallocation as the economy undergoing productivity-enhancing experimentation and churning. Hence, excess reallocation would be a reflection of beneficial trial-and-error activities conducive to improved allocation efficiency. Unfortunately such interpretation is not warranted in Namibia’s case due to the prevalence of low value-added and fragile employment relationships in combination with the substantial shedding of agricultural labor. As we argue in the next section, apparent initial improvements in productivity performance should not be interpreted as evidence that a truly productivity-enhancing environment is present. Table 2.3: Economy-wide Reallocation (percent) 97-00 00-04 Job Creation Rate 16 11 Job Destruction Rate 9 23 Net Employment Growth Rate 7 -12 Gross Reallocation Rate 25 34 Excess Reallocation Rate 18 22 Source: Calculations using NLFS data III. PRODUCTIVITY DYNAMICS 2.12 Growth accounting suggests an improved aggregate productivity performance in the period 2000 – 2004 vis-a-vis 1997 – 2000. However, this result should be viewed with care. Aggregate productivity growth, measured as the residual of output growth after labor and capital contributions are subtracted, moved into positive territory after the year 2000 (Figure 2.6). Although this is consistent with the view that productivity-enhancing reallocation effects have started to kick in from 2000 onwards after a period of accommodation from 1997 to 2000, issues concerning input mis-measurement and the higher level of aggregation in the analysis prevent any endorsement of such view. The particular complications involved in conducting a growth accounting exercise in Namibia have to do mainly with the behavior of educational data, the fluctuations in labor participation rates and the fact that some information must be extrapolated given that the surveys were conducted only in 1997, 2000, and 2004. Considering alternative scenarios and assumptions, a fairly robust conclusion is that residual-based productivity performance followed an improving trend in the period considered. Figure 0.6: Namibia Growth Decomposition 14 See Davis, Haltiwanger and Schuh (1996) for detailed explanation on the methods and concepts. As defined here, Job creation (destruction) rate measures positive (negative) employment growth in expanding (contracting) sectors as a proportion of total employment. Because of data limitations, sectors (rather than firms) are used as unit of analysis. 14 8% 7% 6% 5% 4% 3% 2% 1% 0% 1998 1999 2000 2001 2002 2003 2004 2005 -1% -2% K Contribution H Contribution TFP Growth GDP Growth Source: NLFS and WDI 2.13 A reduction in the economy-wide labor force participation rate puts a bit of perspective on the growth accounting exercise. The reduction in labor force participation commands negative labor contribution to economic growth as fewer workers were engaged in production. Because aggregate productivity is measured as a residual in the standard growth accounting exercise, it is simple to understand how, mechanically, a reduction in labor input will show up as an increase in aggregate productivity if output does not contract accordingly and the contribution from the capital input is stable as shown in Figure 2.6. Such a scenario is perfectly consistent with the economy rebalancing towards more productive sectors, as it will need less labor and yet can produce more. Hence, the enhanced productivity performance is tangled up with a significant drop in labor force participation and one should be cautious before welcoming this as good news.15 Table 2.4: Labor Force Participation Rates 1997 2000 2004 Total Females Males Total Females Males Total Females Males Urban 67 58.1 75.3 66.2 58.9 74.4 66.5 59.8 73.7 Rural 45.4 41 50.9 45.8 40.2 53 34.7 27.9 43.1 Namibia 53.5 46.9 60.9 54 47.4 62 47.9 40.7 56.4 Source: Calculations Using NLFS data 2.14 The reduction in labor force participation is a predominantly rural phenomenon, it affects proportionally more women than men, and it seems to be concentrated in subsistence communal farming. Rural labor force participation rate dropped from 45.8 percent in 2000 to 34.7 percent in 2004. Considering rural women only, the drop was from 40.2 percent) to 27.9 percent over the same period. As jobs were destroyed in agriculture, a fraction of workers left the labor force - that is, not only these workers did not take a job elsewhere in the economy, but they also stopped looking for one. This can be understood in a context of displaced workers that lack skills newly demanded in the labor markets and are discouraged to continue any search. This issue brings to light the need to cushion the reallocation process with appropriate safety nets 15 If one conducts the growth accounting exercise without correcting for labor force participation, the strong kick in productivity after 2001 disappears, but the general trend of improvement in productivity still persists. 15 such as unemployment insurance, health services and social security. All of these will certainly affect incentives in the labor market and may lead to a more sluggish reallocation process, but it is a trade-off that countries with large uninsured social segments can not overlook. Furthermore, to the extent that lacking social safety nets allows skill obsolescence of workers to have severe negative effects on rural family income, human capital accumulation of their children become at risk as well and long-term economic growth prospects are worsened.16 2.15 Reallocation of labor was comparatively more productivity-enhancing in 2000 – 2004 than in 1997 – 2000. This is evident when aggregate labor productivity growth (measured as the change in value-added per worker) is examined. By combining sectoral value-added data from World Development Indicators (WDI) and sectoral employment data from the Namibian Labor Force Survey (NLFS), it is possible to construct sectoral value-added per worker (or sectoral labor productivity equivalent). This information is used to examine whether labor resources were flowing to sectors with highest labor productivity or not. Firstly, though, the sectoral labor productivity values are used to generate an economy-wide aggregate measure of labor productivity as an employment-weighted average. By construction, this is not the same labor productivity that can be extracted from the growth accounting exercise. Nonetheless, it provides an alternative window into the nature of the Namibian labor reallocation process. As Figure 2.7 indicates, there is evidence that the 2000 – 2004 period was more productivity- enhancing than the previous four years.17 Overall, the data is consistent with the view that from 2000 to 2004 Namibia moved into a phase in which productivity gains became more visible.18 16 See Caballero and Caballero and Hammour (1996) for a discussion on the optimal combination between unemployment alleviation incentives and pace of technological renovation. 17 It is important to emphasize that, again, there are considerable uncertainties surrounding the calculations above, so the magnitudes or point estimates are not highlighted, but rather the overall directional movement of the growth rates is examined. Additionally, it should be noted that, by definition, labor productivity measures basically free-ride on any capital accumulation that has taken place over the period. 18 The methodology applied to obtain the TFP productivity measures was based on a Cobb-Douglas production function with capital and labor as inputs. Data from NLFS was used to adjust for the drop in the labor participation between 2000 and 2004. As already emphasized, the residual-based measure of TFP and problems with constructing of a quality-adjusted labor input series require care in interpreting the results. Moreover, growth accounting is not an appropriate method for identifying deep determinants of growth (due to its high level of aggregation) but simply a breakdown procedure that allows one to evaluate proximate determinants. In the context of Namibia, the usefulness of the exercise relies on its ability to capture that aggregate productivity has undergone important changes in the period 00-04, which is validate by analysis of direct measures of labor productivity (value added per worker) and, most importantly, is consistent with the sectoral employment dynamics highlighted in the chapter. 16 Figure 0.7: Productivity Growth 35.00 30.00 25.00 20.00 % 15.00 10.00 5.00 0.00 1997-2000 2000-2004 -5.00 Labor Productivity Growth (VA-based, non-growth accounting) Aggregate Productivity Growth (TFP, growth accounting Source: NLFS and WDI 2.16 This is largely a reflection of labor moving from least productive to other sectors. Agriculture displays the lowest labor productivity level amongst the sectors. If the lower productivity sector shrinks, the average productivity must increase. So, are the productivity gains observed merely a mathematical truth? Figure 2.8 shows how many times larger labor productivity of any given sector is in comparison to Agriculture. As expected, capital-intensive groupings such as Mining & Quarrying or Manufacturing will show up very strongly in the comparison. However, comparisons against more labor- intensive sectors also indicate levels of labor productivity three times higher than in Agriculture. As a result, it becomes evident that the shedding of labor from agriculture will increase average aggregate labor productivity. The economy wide labor productivity increase reflects a simple composition effect, whereby the relative importance of the lowest productivity sector declined. Once the structural transformation is complete, such composition effects will not be the key drivers of labor productivity. 17 Figure 0.8: Labor Productivity Relative to Agriculture, 2004 25.00 20.00 15.00 10.00 5.00 0.00 g ng g ly on .. ts . n s i shin a rri turi n u pp ucti e pa ran u n.. i atio i n... r vice ,R u ed us F Qu fac rS str de ta om m Se & anu ate on a R es C term n dB ent g W C r nin M tai lT an d an d ial in ga nm Mi a s& e ls e c n tin v er g n ,G R Ho te tor a a e Go ic ity and S Fi n te ,R tr ale , ec rt sta El oles s po a lE h n W Tr a Re Source: NLFS 2.17 While sectors like Agriculture are loosing some relevance in terms of their contribution to output and employment, other sectors are taking their place. Agriculture, the sector with the lowest labor productivity level, has reduced both its output and employment share over the recent years; while Wholesale & Retail, an also labor-intensive sector but with labor productivity levels three times higher than Agriculture, has increased both its output and employment share. Figure 2.9 provides a sectoral breakdown of changes in employment and output shares between 1997 and 2004 (the size of the bubbles represents sectoral labor productivity in 2004). Concentrating on efficiency gains, one would like to see small bubbles placed in the lower-left corner of the graph and, at the same time, large bubbles placed on the upper-right corner. That is, low productivity sectors should be losing relevance in the economy (both in terms of output and employment) to higher productivity ones. As shown, Agriculture is indeed losing relevance and quite a few other sectors are increasing both employment and output shares. While some capital-intensive sectors such as Mining & Quarrying, Transport and Manufacturing are able to increase their output share without a corresponding performance in employment, the performance of Wholesale & Retail is noticeable, once this is the sector with the best potential to absorb some of the low-skilled workers typically employed in agricultural jobs in the short-run. 18 Figure 0.9: Employment Share vs Output Share by Sectors 1997 - 2004 Changes 2.00 1.00 Change in Output Share % 0.00 -15.00 -10.00 -5.00 0.00 5.00 10.00 -1.00 -2.00 -3.00 -4.00 Change in Employment Share % Agriculture and forestry Fishing Mining & Quarring Manufacturing 2 1.5 1 Electricity, Gas & Water Supply 0.5 0 1 2 3 Construction -0.5 -1 -1.5 Wholesaleand Retail Trade, Repair of motor vehicles -2 -2.5 -3 Hotels and Restaurants -3.5 Transport, Storage and Communication Financial intermediation Real Estate, Renting and Business Activities Government Services Source: NLFS 2.18 The interplay between productivity and employment dynamics is crucial for both the magnitude and the quality of Namibian economic growth along the rebalancing process. Sectoral labor productivity can grow (reduce) as a result of either increases (decreases) in output or decreases (increases) in employment at the sector level. Thus, mechanically, the shedding of labor from Agriculture will represent a strong contribution to productivity growth in that sector. This is clear in Figure 2.10, which also indicates that value-added in agriculture had negative growth from 2000 to 2004. More interestingly, perhaps, is the dynamics seen in Wholesale & Retail. Despite positive value-added growth in the sector, sectoral employment growth was strong enough to cause weak and negative labor productivity growth. This is consistent with a scenario in which low-skilled workers without economic opportunities elsewhere in the economy flood that sector. It also brings to light the concern that if we want this process to be truly productivity-enhancing, the service sector as a whole will need to be more than a repository for “yesterdays� typical subsistence agricultural worker. So far, there are no encouraging signs that this is actually happening. Providing the right conditions for workers to command an increasingly higher value in the labor market is a key challenge for pro-poor growth in Namibia. This will require proper intervention from the government to assure that rebalancing does not simply fall into urban poverty. 19 Figure 0.10: Decomposing Labor Productivity (Y/L) Growth 40.00 30.00 20.00 10.00 % 0.00 0 4 0 4 -0 -0 -0 -0 -10.00 97 00 7 0 l9 l0 re re ai ai tu tu et et -20.00 ul ul R R ic ic e& e& gr gr al al A A es es -30.00 l l ho ho W W -40.00 Y Contribution L Contribution Labor Productivity Growth Source: NLFS 2.19 Observed labor productivity growth can not be taken as synonymous with improved allocational efficiency of labor resources across sectors. Evidence from the Labor Force data confirms this when we use the technique developed by Olley and Pakes (1996).19. The level of aggregate labor productivity can be broken down into two terms - the first captures the unweighted mean of labor productivity across sectors, while the second term broadly captures how much each sector deviates from that unweighted mean. This term provides a measure of allocational inefficiency overtime. Productivity gains are only labeled as “improved allocational efficiency� if they represent a favorable shift in the sectoral distribution of labor-productivity levels relative to a year-specific mean. The application of this decomposition to Namibia (Figure 2.11) suggests that increases in aggregate labor productivity from 1997 to 2004 are not due to increased allocational efficiency of labor resources at all. Despite measurement uncertainties involved, the simplicity of the decomposition technique and its stark result highlights the need to exercise caution in identifying favorable performance in terms of productivity growth to truly gains in allocational efficiency. 19 Other techniques are provided by Foster, Haltiwanger and Krizan (2001) for discussion and application of different techniques. 20 Figure 0.11: Allocational Inefficiency All data normalized to 1997 Labor Productivity 3 2.5 2 1.5 1 0.5 0 1997 -0.5 2000 2004 -1 -1.5 -2 Unweighted Mean Allocational Eficiency Labor Productivity Source: calculation using NLFS and WDI IV. EMPLOYMENT DYNAMICS 2.20 Higher economic growth, or even productivity growth, does not guarantee increased employment opportunities, particularly for the poor. Namibia lost almost 20 thousand jobs in net terms from 1997 to 2004 and output went up by more than 30 percent during the same period. On the basis of these stylized facts, one may say that Namibia has undergone a so-called “jobless growth� episode at the aggregate level, meaning that the increase in economic activity did not result in net employment generation for the economy. However, this is not a puzzle. Indeed, as the economy undergoes a structural transformation whereby the low-productivity labor-intensive agricultural sector shrinks and other better-performing ones grow, it is possible for the entire economy to grow and shed labor at the same time. A more relevant issue is why the mass of displaced (and not-absorbed) agricultural workers was not fully incorporated elsewhere in the economy. The question then becomes not how output could have grown without accompanying employment generation, but rather why economic opportunities did not materialize more intensively. Additionally, evidence on reduced labor force participation at rural areas (Table 2.4) and pervasive youth unemployment (Figure 2.12) suggest that the burden of such “missing economic opportunities� was predominantly carried by the poor, in a clear-cut demonstration that poverty alleviation and inequality reduction are not corollaries of economic growth. 21 Figure 0.12: Youth Unemployment (Broad Definition), 1997, 2000 & 2004 (%) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1997 2000 2004 Total Male Female Source: NLFS 2.21 Skill mismatches in the labor market are key to understanding why economic growth did not translate into more employment opportunities for the poor. Shifts in sectoral employment shares alter the demand for worker skills in the economy. Unfortunately, skill acquisition on the side of the workers does not respond quickly. Not only does the process take time to happen, but often lack of training and/or effective educational opportunities keep youngsters from developing the much needed skills altogether. Other times, older agricultural workers may be simply “skill-locked� for the remaining of their productive lives, and there is little public policy recourse other than social safety nets. The sluggish nature of skills build-up combined with a rapidly transforming production structure creates skill mismatches in the labor market with grave consequences over the behavior of economic agents. Entrepreneurs will refrain from starting-up or expanding activities due to skill shortages and discouraged workers may interrupt job searches, cutting short interaction and experimentation typical of healthy market economies. Hence, labor market segmentation between skilled and non-skilled workers is not only preventing the poor from participating in economic growth, but it also represents unrealized efficiency gains for the economy as current labor resources and entrepreneurial drive are wasted. 2.22 Skills mismatches also contributed to increased structural unemployment, although actual increases in the unemployment rates were mitigated by reductions in labor force participation. As shifts in employment shares take place and new economic opportunities available in the service sector requires a different set of worker skills, the economy embarks on a phase of higher job destruction probabilities and lower worker transition rates into employment. As a result of such real forces, equilibrium unemployment rates (or structural unemployment rates) increase - this effect, of course, may be compounded by nominal and/or regulatory rigidities present in the labor markets that exacerbate deviations from such higher equilibrium rates.20 On the other hand, reduction in labor force participation rates triggered by discouraged unemployed workers prevent increases in structural unemployment from fully materializing as the proportional fall in the numerator of the unemployment rate is bigger than the fall in the denominator. In broad terms, such reasoning can be applied to Namibia where the full extent of 20 Aghion and Howitt (1994) also developed influential work connecting labor reallocation to the dynamics of the equilibrium rate of unemployment. Although they pursue a slightly different point, they ultimately emphasize how economic growth affect long-term unemployment through the reallocation process. 22 structural unemployment is not visible due to a reduction in participation rates. As Figure 2.13 indicates, there was no dramatic increase in the headline unemployment rate from 1997 (19.5 percent) to 2004 (21.9 percent), but plenty of action is taking place under the surface. Indeed, rural unemployment rates went up from 15.6 percent in1997 to 20.7 percent in 2004, despite a decline of over 55 thousand in the rural labor force – as a rough back-of-envelope calculation, if such 55 thousand workers had not left the labor force and remained there unemployed, the rural unemployment rate would have gone up to 37 percent in 2004. The situation becomes yet more dramatic if one focuses on rural women (with a counter-factual unemployment rate estimated at 47 percent). On the other side, urban labor force grew by 51 thousand workers from 1997 to 2004, failing to make up not only for the 55 thousand loss from rural labor force, but also for approximately 170 thousand net increase in the working-age population during the period. This indicates a substantial failure of the economy to channel resources to productive use. Figure 0.13: Unemployment Rate and Labor Force 26.0 300,000 24.0 250,000 Unemployment Rate (%) 22.0 200,000 20.0 Workers 18.0 150,000 16.0 100,000 14.0 50,000 12.0 10.0 0 1997 2000 2004 Urban Labor Force (RHS) Rural Labor Force (RHS) Total Unemployment Rate Rural Unemployment Rate Urban Unemployment Rate Source: NLFS 2.23 The increase in urban labor force from 1997 to 2004 (which outnumbered the rural labor force in 2004) combined with urban employment generation and virtually no growth in participation rates at urban areas managed to keep aggregate unemployment rates from displaying big increases. The counteracting force able to restrain the increase of the Namibian headline unemployment rate came partly from the urban economy, which presented a reduction of the unemployment rate from 23.8 percent in1997 to 22.8 percent in 2004. The fact that labor force grew and unemployment rate fell at the same time in urban areas, implies that large enough urban employment generation took place. Indeed, approximately 42 thousand urban jobs were created from 1997 to 2004, absorbing around 80 percent of the increase in the urban labor force. This demonstrates that the Namibian economy does present some potential for employment generation, but once again we can not neglect that such result relies heavily on the fact that net increases in working-age population are not being satisfactorily incorporated into the labor force. In a sense, this is even more concerning than increased unemployment would be since it reveals that some workers simply gave up on actively seeking jobs and thus are not counted as part of the labor force anymore when the strict definition of unemployment is used. Should the labor force increase more substantially to reflect net growth in working-age population (which would necessarily amount to an increase in participation rates), then the unemployment rate would be a 23 more meaningful indicator of the employment generation capacity of the economy. Unfortunately, the very fact that labor force is not keeping up with the growth pace of working- age population may be a reflection of limited employment generation capacity since nothing precludes inactive workers from transiting into employment directly without going through unemployment status. 2.24 Output-elasticity of employment at the sectoral level seems to uncover a few promising opportunities for employment generation. However, it is unclear whether these high- elasticity sectors are well-prepared to create jobs in quantity and quality necessary to promote pro-poor growth. Fishing, Wholesale & Retail and Hotels & Restaurants all display high output-elasticities of employment, and Figure 2.14 indicates that for each one per cent growth in sectoral value-added, employment grew by 2, 1.3 and 12 per cent, respectively, in each sector during the 1997 – 2004 period.21 It must then be the case (as a mathematical truth) that labor productivity growth was negative in all three sectors over the period. The challenge is to make this a transitory phenomenon whereby sectors not only absorb labor, but can actually “move it up� in the value chain and become more productive overtime. In contrast, the reduction in labor productivity can be a more permanent phenomenon if employment growth is predominantly concentrated in low value-added activities and workers can not break away from them. Unfortunately, labor market segmentation between skilled and non-skilled workers in Namibia makes the second scenario more likely. Hence, providing effective training and education opportunities tailored to the skills demanded in the market ought to be a component of any broader strategy designed to promote sustainable and inclusive growth in Namibia. Figure 0.14: Employment Generation (1997-2004) 14 6.00 12 5.00 Relative to Agriculture 10 4.00 Elasticity 8 3.00 6 2.00 4 2 1.00 0 0.00 Fishing Wholesaleand Retail Hotels and Restaurants Trade, Repair of motor vehicles Ouput-elasticity of employment (LHS) Labor productivity level (RHS) Source: NLFS and WDI 2.25 There are regional disparities in employment generation capacity in Namibia. Total employment in Namibia reduced approximately 11 percent from 2000 to 2004, with urban employment expanding 9 percent and rural employment contracting 28 percent over the same period. In addition, figure 2.14 indicates that regional employment growth was sharply 21 Kapsos (2005) present cross-country evidence of employment elasticities over the period 1990-2004 and the elasticities of the three sectors presented above are definitely high in relative terms. 24 heterogeneous across the country. The rural versus urban dynamics is an integral part of the structural transformation that the economy is undergoing, and the distinct possibility that labor inflows are being mostly absorbed in low value-added activities raises concerns. Figure 0.15: Employment Growth rate (2000-2004) - 55% - 23% 39% 17% - 58% - 42% 1% 23% - 18% 14% - 35% - 7% 53% Source: NLFS The response is not to interrupt the flow by decree, but rather to create conditions for an orderly absorption. If young workers migrate to urban areas and are stuck in low-paying jobs with poor working conditions, they will be unable to command increasingly higher value in the labor market throughout their employment histories. By providing effective training and educational opportunities in rural areas, internal migration may become more easy-paced. Additionally, development strategies focused on identifying and stimulating targeted economic inclinations in rural regions, combined with safety nets designed to prevent young members of poor rural households from joining labor force too early, seem to be necessary ingredients of this broader agenda addressing regional disparities in the context of a rapidly transforming economy. 2.26 There is a pronounced relationship between unemployment incidence and age, marital status and regional dispersion.22 Econometric analysis of the incidence of unemployment from the 2004 NLFS using a primary probit model, separately for men and women confirms that unemployment incidence is greatest among the youngest group: 15-19 years of age. The least dis-advantaged are 45-49 year olds – men of this age group are 18 percentage points less likely to be unemployed than the 15-19 year olds; and women are 26 percentage points less likely. The relative advantage of age tapers off over the age of 50, especially for men. Marital status (being married or cohabiting as a married couple) is associated with a lower incidence of unemployment, especially for men. A married man is about 14 percent less likely to be unemployed than a single one. The analysis also shows that remote northern administrative regions, including the Caprivi region are more prone to unemployment, particularly for women. Some interior regions are less prone. V. SUMMARY AND CONCLUSIONS 2.27 The Namibian economy is experiencing substantial shifts in sectoral employment Shares. Employment in agriculture has decreased and labor resources need to be re-channeled to alternative productive uses. Total employment in Namibia fell by approximately 15 thousand 22 For detailed estimation results, see Henley (1997). 25 from 1997 to 2004, while employment in agriculture fell by approximately 42 thousand over the same period. Despite some employment generation in other sectors, the economy was unable to absorb the corresponding amount of labor shed from agriculture, not to mention the net growth in the working-age population. 2.28 At the same time, output growth has kept its upward trend. And sectoral growth contributions to GDP have not caused major disruptions in response to the underlying shifts in employment sectoral shares. This was possible because the Namibian economy was able to create jobs outside the agricultural sector in activities with higher value-added, but there are still labor resources sidelined as the result of the shrinking employment in Agriculture. The ability to move such workers into market activities is a crucial challenge for Namibia, which ultimately determine its fortunes in terms of sustained pro-poor economic growth. 2.29 There is some evidence that the labor reallocation process has been accompanied by favorable productivity dynamics. However, causal links are not clear and there remains a high probability that such productivity gains are due to transitory compositional changes. Growth accounting exercises suggest that total factor productivity performance has improved from 2000 to 2004 vis-a-vis the period 1997 to 2000. Nonetheless, measurement errors, particularly ones related to labor quality, and the very aggregate nature of standard growth accounting exercises recommend caution before drawing inferences about the productivity content of the labor reallocation process. Analysis of labor productivity and employment dynamics at the sectoral level confirms that the economy is reshuffling resources to higher-productivity activities, but there is no indication that labor absorption is generating spillover effects necessary to move the economy up in the production value chain. If the reallocation process fails to accomplish that, moving labor resources will deliver a one-shot gain with limited impact over long-term economic growth and inequality. 2.30 Employment generation in expanding sectors remains a significant challenge not only in terms of quantity, but also in terms of quality, both fundamental for making the most out of the labor reallocation process. Namibia has demonstrated potential to create jobs across different sectors as agriculture shed labor. However, it has not done so in enough quantity. Indeed, not only did unemployment rates increase, but also labor participation rates experienced a substantial drop from 53.5 percent in 1997 to 47.9 percent in 2004. Labor market mismatches between skills demanded by employers and prevalent skills available in the working-age population create serious impediments to the efficient absorption of freed-up agricultural labor and harm prospects of a productivity-enhancing reallocation. Labor market regulations also contribute to this state of affairs as hiring and firing decisions from employers are made less responsive to economic conditions23. 2.31 There is a clear regional dimension to growth and development challenges in Namibia. Employment growth rates across regions are widely heterogeneous, pointing to the need to tailor region-specific strategies for growth and development. A particular concern is that young workers are migrating to cities and engaging in casual labor rather than investing in their human capital accumulation, which contributes to deepen labor market segmentation and reduce 23 When prospects for economic conditions are favorable and entrepreneurs anticipate strong demand for their goods/services, hiring decisions may be stifled due to firing costs, since the entrepreneur knows that in the event of negative shocks to the positive outlook he/she will have to go through costly separation. When economic conditions become less favorable, entrepreneurs may postpone firing due to costs as well and, although this may keep employment from falling, it may also delay productivity-enhancing restructuring from taking place and slow down the pace of hiring once economic conditions improve. 26 prospects for sustained growth. In addition to migration, HIV/AIDS also contribute to rural population decline. In this context, anecdotal evidence of school closings and general perception of widespread lack of opportunity in rural regions reinforce disorderly internal migration and must be addressed. 2.32 The shift in sectoral employment has also produced gender related implications in Namibia. Labor force participation declines have been stronger among women and migration from rural to urban areas has been predominantly male. Both create conditions for gender imbalances, which should be monitored and addressed by the government. 2.33 Government has a role to play in supporting productivity-enhancing labor reallocation, but policy decisions will only deliver sustainable pro-poor growth if they correctly identify and address leading market failures as well as government distortions blocking the way. This is examined in the next chapter. 27 The Binding constraints to Growth in Namibia I. INTRODUCTION 3.1 The analysis presented in the previous chapters has shown that Namibia has made a successful transition from colonial rule to democracy. The benefits of growth have been shared through provision and improved access to services to a previously dis-advantaged population. In the short period since Independence, much progress has been seen in the implementation of important reforms. Overall macroeconomic policies have remained prudent, debt levels are manageable and its currency peg to the South African Rand has provided price stability. Public financial management reforms are underway with the development of medium term plans and an information and financial management information system. 3.2 The structural transformation of the economy has, however, left the manufacturing sector behind, with mining sector and government services becoming the engines of growth. The high reliance on mining has left Namibia vulnerable to developments in the international markets for its narrow export base. At the same time, limited backward and forward linkages have limited its employment generation potential. And, further growth of the government sector, a key employer, is not sustainable. With high unemployment rates and volatile growth, it is important to understand what the government should do to continue to enjoy high growth that also creates employment. In this chapter we aim to identify binding constraints to growth based on the growth diagnostic approach developed by Hausmann, Rodrik and Velasco (HRV). Such an analysis has been useful in many other countries to help government focus on critical areas of intervention that are likely to have high marginal returns. II. A CONCEPTUAL FRAMEWORK FOR GROWTH DIAGNOSTICS 3.3 The growth diagnostic strategy is aimed at identifying the most binding constraints on economic growth and, therefore, at short-listing the set of policies required to lift the obstacles to economic activity. A successful analysis recognizes the most damaging constraints and, by recommending the most appropriate policy interventions, provides the biggest bang for the reform process. Following the HRV approach, the methodology to conduct a growth diagnosis can be represented as a decision tree. 28 Figure 0.1: Growth Diagnostics Source: Hausmann, Rodrik and Velasco, 2004. 3.4 The procedure starts from an exhaustive overview of all possible factors which might have the potential to either enhance or counter growth and tries to identify what are their interactions across distorted markets. The diagnostic downplays those elements with less significant or negative effects and selects those factors that seem to have a large positive impact on growth, concentrating its policy recommendations on the latter. 3.5 Growth diagnostics assumes a simple growth model whose broad production function depends on several factors subject to be constrained; such factors are regrouped under three categories: (i) Financing constraints (low domestic savings, poor intermediation in domestic financial markets, limited access to external financial markets or low foreign direct investment), (ii) Low social returns to factors of production (insufficient investment in complementary factors like human capital, insufficient infrastructure, or poor geography), (iii)Low private appropriability (high macro and micro risks, inefficient tax structure or high tax rates, poor property rights and contract enforcement, too little product). 3.6 The challenge is to identify the factors that have the highest marginal return (an indication that they are restraining growth) and, by extension, the policy change that would have the greatest beneficial impact on growth. 3.7 We can therefore infer two rules: firstly, factors of production that show high rates of return may be considered as binding constraints to growth. Secondarily, changes in the supply of a binding constraint should have very large effects on growth, while changes in the supply of a factor that does not bind would not. 3.8 The growth diagnostic approach offers three significant advantages: (i) it is country specific and assumes that a similar growth strategy for all countries targeted at different binding 29 constraints is unlikely to prove productive; (ii) it is comprehensive in its approach and selective in its recommendations; and (iii) it is heterodox, because the removal of the main binding constraints might combine sound economic principles of orthodox reforms with less-orthodox policies, often based on second-best options. 3.9 On the other hand, the growth diagnostic approach has three significant disadvantages: (i) it is static, for it considers the steady-state solution to the dynamics of constraints that may be binding today but not necessarily in the future; (ii) it does not consider the sequencing of reforms among present and future binding constraints; and (iii) it has difficulties to finding rates of return, which are often needed to assess whether or not a constraint is binding. III. APPLICATION TO NAMIBIA: IDENTIFYING BINDING CONSTRAINTS TO GROWTH 3.10 In this section we will investigate the reasons that keep growth low in Namibia. Through the use of available evidence, we will try to understand whether it is inadequate returns to investment, inadequate private appropriability of the returns, or inadequate access to finance. If it is a case of low returns, is that due to insufficient investment in complementary factors of production (such as human capital or infrastructure)? Or is it due to poor access to imported technologies? If it is a case of poor appropriability, is it due to excessive taxation, poor property rights and contract enforcement, labor-capital conflicts, or learning and coordination externalities? If it is a case of poor finance, are the problems with domestic financial markets or external ones? A. FINANCING CONSTRAINTS Saving and Investment 3.11 Namibia’s national saving rate, at 53 percent of GDP in 2006, is relatively high compared to other sub-Saharan countries. Despite this, per capita GDP in Namibia has been stagnant for almost two decades. High saving has not translated into higher growth rates. On the other hand, stagnant growth has co-existed with relatively high saving. In the face of this puzzle, it might be necessary to examine the sources of domestic saving in Namibia and find out why this has not been translated into higher economic growth. 3.12 Another issue that may also offer some insight into the relationship between saving, investment and growth in Namibia is the extent to which savings can be channeled into productive investment. Is the nature of savings such that it is directly available for domestic investment? While the decision to save is made by individuals and corporations, the decision to produce is made by firms. The extent to which firms can use saving to finance their productive projects may be affected by the level of intermediation in the domestic economy. Firms may face discrimination based on size, age, reputation as well as access to international markets. These factors may therefore imperil the availability of savings for investment and hence hinder growth. This latter issue is addressed separately in the section dealing with domestic credit availability and economic growth. 30 Table 3.1: Savings Rate as a Percentage of GDP, 2000-2006 2000 2001 2002 2003 2004 2005 2006 Gross National 30 33 37 47 40 40 53 Savings Source: IMF, WEO 2007. 3.13 While private savings have considerably increased over the past two decades, public savings have declined24. Private savings went from 5.3 percent of GDP in the 1982-1991 decade to about 24 percent of GDP in the period between 1992 and 2005. On the other hand, public savings were higher than private ones in the eighties (7.9 percent of GDP) and declined over the nineties, accounting for 2.2 percent in 1992-2005. 3.14 Private savings currently make up as much as 95 percent of gross domestic savings, up from about 50 percent registered in the 1982-1991 period. Within private savings, for the 1982-1990 period, corporate savings accounted for a huge proportion of the total and accounted for 6.7 percent of GDP while household savings made up only 1.5 percent of GDP. Due to the lack of data, it is difficult to separate the different components of private savings after independence in Namibia but it is very likely that household savings increased substantially after independence. The ratio of contractual saving, which is just one component of household saving, to gross domestic savings now stands at an average of about 53 per cent for the period 1992 to 2005. 3.15 Contractual savings now represent a major source of potential investments in Namibia, accounting for about 65 percent of total private savings. Contractual savings (i.e. household savings that get funneled into, for instance, pension funds, unit trusts and life insurance funds) covered more than 50 percent of gross domestic savings in the years up to 2005. . Contractual savings became the main driver of increase in gross and private savings after Namibian independence; pension funds, for instance, made up 14.4 percent of GDP in 2004, up from just 3.4 percent in 1990 and long-term insurance companies’ savings as a percentage of GDP more than doubled in the decade leading to 2005. 3.16 Nevertheless, the expected impact of contractual saving on the development of the capital market has been quite elusive in Namibia. The economic contribution of the Namibian Stock Exchange (NSX) has remained small. It lists 9 local companies with a market capitalization of barely 10.2 per cent of GDP in 2006 with a market turnover of 1.9 per cent. The value of local traded equities is low at 0.3 per cent. Contractual saving institutions have existed for several decades in Namibia. The contractual saving industry is well developed and mature and is supposed to be able to exert some meaningful impact on local market development. The poor performance of the NSX attests to the fact that contractual savings may not have significantly impacted on the development of the capital market in Namibia. 3.17 Financial savings in deposits have increased significantly over the past two decades. The ratio of broad money (the sum of currency held by the public, demand and checking account deposits and savings deposits) has grown from 23 percent of GDP in 1990 to 52 percent in 2006. 3.18 The increase in savings registered in post-independence Namibia did not translate into higher growth. This was due the openness of the Namibian economy, that allowed domestic 24 This is partly a reflection of higher investment expenditures and partly reflects a high civil service payroll. 31 savings to leave the country in search for high yield and risk free foreign assets, thus reducing growth. This might particularly be true for contractual savings moving towards Rand denominated assets that yield higher real returns. 3.19 Continued outflows of capital to South African financial markets have kept Namibia’s international reserves relatively low (1.6 months of imports in 2006) (IMF, 2007). Net outflows in portfolio investment increased by 0.4 percent to N$5.5 billion in 2005 as South African equity and debt instruments continue to attract Namibian investors (Bank of Namibia, 2006). About 60 percent of Namibia’s savings are exported. This hampers the development of domestic financial markets and the prospects for export diversification. According to FIAS (2006), net FDI inflows in 2004 were estimated at about $78 million, or about 2.3 percent of GDP. FDI flows, though, have been erratic in recent years, falling from a high of $118 million in 2000 to a range from $33 million to $51 million in the period thereafter. Gross fixed capital formation is about 23 percent of GNI. While these are relatively good by regional standards, Namibia aspires to compete with the most dynamic emerging markets, which usually perform much better. Figure 0.2: FDI in Namibia, 1991-2004 Source: FIAS (2006) 3.20 Given that in the past two decades domestic savings consistently rose over domestic capital formation (see below table), increased FDI inflows might have simply substituted domestic investments thus not translating into higher growth. Namibia therefore needs to direct domestic savings towards domestic investments. 32 Table 3.2: Saving, Investment and Growth Rates (percent of GDP) Gross National Gross Domestic S-I Gap Real GDP Saving Rate Investment Rate Growth 1980-1989 19.3 17.1 2.2 1.1 1990-1999 24.7 20.3 4.4 4.1 2000-2006 33.0 24.8 8.2 4.3 Source: IMF, WEO 2007. 3.21 High lending rates do not seem to be a factor constraining private investments given that real lending rates are higher in South Africa than in Namibia. Yet, the spread between lending and deposit rates is lower in South Africa than prevailing in Namibia suggesting that considerable inefficiencies affect the Namibian banking sector and threatening the very existence of SMEs that heavily rely on external financing as a mean to survival. 3.22 Overall, savings do not appear to be a constraint on the Namibian economy. Even though the Namibian economy has a saving surplus, the fact that this saving is not available for domestic investment renders it ineffective for promoting domestic economic growth. Also, the fact that Namibia is not able to attract substantial levels of FDI into the relevant sectors creates a gap in terms of investible funds. In this way, saving becomes a constraint on domestic economic growth until such a time when Namibia is able to attract sufficient foreign investment. It has also to be known that a country that is not able to retain domestic saving cannot guarantee foreign investors the existence of adequate returns or the safety of their investment. Policies must therefore focus on how to enhance the efficiency of the contractual saving schemes in Namibia and how to translate the saving they generate into the development of the domestic capital market. The IMF/World Bank FSAP (2006) contains a number of such policies. Among others, FSAP recognizes the fact that the domestic investment issue goes beyond the financial sector. Measures such as encouraging the employment of people with the right skills and experience, establishment of a vibrant private equity industry, promotion of leasing and factoring companies and the development of assets securitization should be embarked upon as a way to promote domestic investment. Credit Availability and Access to Financial Services 3.23 The availability of credit is a major factor for the promotion of rapid economic development. It has been argued that one of the reasons why many developing countries have failed to achieve sustained economic growth in recent times despite significant macroeconomic reforms is the widespread lack of access to credit for individuals and businesses (Freedman and Click, 2006). This derives from the importance of credit in consumption, investment and capital formation. Production credit has been identified in a number of studies as a major constraint to speedy economic growth. 3.24 Empirical studies have examined the relationship between the level of credit to the private sector and economic growth. Such studies have found that economic growth is substantially higher in countries with relatively robust lending to the private sector (King and Levine, 1993, Levine and Zevros, 1998, Levine et al, 2000). If increases in credit to the private sector can result in higher economic growth and disproportionately benefit the poor, it is important to investigate the mechanism through which this occurs. Namibia has one of the highest credit and broad money to GDP ratios in Sub-Sahara Africa but records low real growth 33 rates. Broad based empirical evidence suggests a linear relationship between these two indicators of financial development and real growth rate. It might be that the limitation to bank financing of the private sector does not lie in the availability of credit but other factors such as limitations in securing lending, weak enforcement of creditor rights in the face of risks in lending and insufficient debtor information systems (Sacerdoti, 2005). This is investigated in the following paragraphs. Trends in Domestic Credit Growth 3.25 Total commercial bank credit in nominal terms, which represented 33.6 per cent of GDP in 1983, has grown rapidly and as at December 2006 stood at about 53 per cent. Commercial bank credit to the private sector has seen a major boost rising from 15 per cent to about 56 per cent during the same period after a slight down turn between 1996 and 1999. On the other hand credit to government, which was barely 1.3 per cent in 1983 has also seen an increasing trend, peaking in 1999 when it nudged 4.1 per cent. Thereafter it has taken a decline falling to 0.3 per cent in 2006. 3.26 There is little variability in the allocation of credit to the different sectors over the years. Substantial credit is still extended to individuals mainly in the form of mortgage loans. On the average 62.8 per cent of private sector credit went to individuals between 2001 and 2006. Most credit extended by banks (to individuals) is mainly used to finance properties (mortgage advances) and other personal items and for consumption (e.g. installment credit). Mortgage loans now consumes more than 50 percent of total loans and advances leaving other loans and advances consisting of overdrafts and installment credit to account for the remaining. The devotion of a disproportionate size of loans and advances to mortgage could leave the banks vulnerable to credit risk (IMF/ World Bank FSAP, 2006. 3.27 Commercial banks’ lending capacity in nominal terms25 increased substantially over the past few years. It showed an average annual growth rate of about 28 per cent between 1992 and 2005. Moreover, the ratio of M2/GDP is relatively high compared to the trends in sub- Saharan Africa (SSA) and other middle-income countries. The median figure for SSA, excluding Nigeria and South Africa is 27.3 (2001-04) compared to 40.2 percent for Namibia for the same period.26 This would infer that commercial bank deposits available for lending should be relatively high in Namibia. Domestic credit to GDP at 48 per cent is about the same as the developing country mode of 49 per cent though lower than the middle income countries mode of 89 per cent. Going by these figures, commercial banks in Namibia ought to be able to lend to enterprises and individuals especially enterprises that are engaged in productive activities. 3.28 Despite the fact the supply of credit has substantially increased, Ikhide (2006) found that for most of the period between 1992 and 2005, demand for credit has persistently outstripped supply of credit suggesting that lending activity is insufficient in Namibia. 3.29 One possible cause of the supply-constrained phenomenon is the perception by banks of a high lending risk. If it is possible for commercial banks to constrain their lending in an attempt to minimize their lending risks without necessarily compromising their profitability, 25 measured as the difference between total commercial bank liabilities and total reserves plus capital account 26 The figure for SSA including Nigeria and South Africa for the same period is 39.8 percent. While for SADC, a figure of 51 per cent is reported. This figure is boosted by the high values for South Africa, Mauritius and Seychelles 34 they will do this27. Some of the evidence from commercial banks balance sheet that tend to support the view that the perception of risk in lending is the main constraint to lending in Namibia is reflected in the following: (i) High liquidity ratio28: The ratio of liquid liabilities to GDP in Namibia in 2005 at 35 per cent is high compared to South Africa at14 per cent (the figures for the US and the UK are respectively 6 and 2 percent respectively). For bank based developed financial systems like Japan and Germany, the figures are 19 and 21 per cent respectively. (ii) Decline in the ratio of risk weighted assets to total assets. Risk weighted assets (RWA) as a ratio of deposit money bank assets (DMBA) increased substantially till 1991. Thereafter there was a steep decline. Risk-weighted assets as a ratio of total assets are expected to decline with prudent supervision and management. However, the sudden drop especially after 1992 could hardly be attributed solely to prudent supervision alone. It could be a pointer to a decline in commercial bank loans supply relative to its total assets. (iii) Decline in overdrafts in total bank lending. The share of overdrafts in total bank lending has also declined over the period. Under normal circumstances, this is a welcome development but the phenomenon here has more to do with the tendency to avoid risk by banks, and corroborates other evidence that shows that banks have tended to exercise more control over their lending. (iv) Pronounced rise in collateralized lending. Collateralized lending has been on the increase during this period. As shown above, mortgage loans as a percentage of total private sector loans has hovered between 44-49 per cent between 2001 and 2005. (v) Movements in lending and prime rates. Finally, we have observed a tendency for average lending rates to move in closer tandem with prime rates in recent times, suggesting that banks have increasingly shifted their lending to relatively safer customers. Access to Financial Services and Lending to SMEs 3.30 Access to financial services is very limited in Namibia. This reflects pervasive rural poverty and the growing population of urban shack dwellers, who suffer from widespread unemployment. The situation is aggravated by the imposition by the commercial banks of high fees for the use of even basic banking services, such as checking and savings accounts. Available estimates indicate that less than 15 percent of the population use transaction, credit or insurance services. The use of savings products is relatively high at 45 percent of the population, but this reflects the large number of savings accounts held with the Post Office Savings Bank. 3.31 Banks focus mostly on the urban population, and on the middle and upper income brackets, totaling 300-400 thousand people out of a total population of 1.8 million. The 27 Commercial banks profitability may not have been constrained in the face of high real interest rates and excessive bank charges. 28 A relatively high ratio of liquid assets to GDP might be suggestive of the fact that commercial banks may be keeping a substantial part of their deposits in liquid assets, such as cash, deposits with other banks, central bank debt, and short-term government securities (Freedman and Click, 2006). 35 proportion of people who use credit services from banks is estimated at only 11.8 percent and those using insurance at 12.8 percent (Genesis Analytics, 2003). According to Beck et al. (2005), on the bank lending side, Namibia comes out 22nd out of 44 developed and developing countries, measured in terms of loan accounts per capita. It is ahead of Uganda and Brazil, but behind Turkey and Mauritius. For the loan-to-income ratio, Namibia ranks 17th, again ahead of Brazil and Uganda, and lagging behind Mauritius and Turkey. Namibia’s loan-to-income ratio is also above the median value for this ratio. For deposits, Namibia ranks 33rd out of 54 countries in terms of deposit accounts per capita, with more deposit accounts than other African countries, except for Mauritius. Similarly on the deposit-to-income ratio, Namibia ranks 19th out of 54, better than other African countries (except for Mauritius). 3.32 The access indicators suggest that Namibia is outperforming other Sub-Saharan countries, but it is lagging behind other countries with comparable levels of per capital income. To a very large extent this is due to the very high income and wealth inequality that prevails in Namibia. It may also be related to the vast geographic size of Namibia and its very low population density. 3.33 Imbalances between rural and urban areas in the provision of financial services are quite pervasive in Namibia. Bank branch density varies enormously between urban and rural regions (Bank of Namibia Research Department 2001). There is only 1 branch per 100,000 people in rural areas where 70 percent of the population lives while there are 18 bank branches per 100,000 people in urban areas where only 30 percent of people live. However, a big obstacle to expanding services in rural areas is the very low population density which is less than one person per square kilometer and renders highly uneconomic an expansion of branch networks with their high fixed costs in terms of building and maintenance expenses as well as staffing costs. According to Beck et al. (2005), in terms of geographic branch density Namibia ranks 97 out of 99 countries. The situation improves slightly when looking at ATM geographic density, where Namibia ranks 83rd, ahead of a few other African countries, but still behind others including South Africa, Kenya and other developing countries. Table 3.3: Rural/Urban Imbalances in Namibia, 1999 Number of percent Average Average Bank Branches share of Household Per Capita Branches Population Income Income per 100,000 people Rural 11 71.1 9,157 1,502 1.1 Urban 74 28.9 28,746 5,946 18.3 National 85 100.0 15,797 2,786 6.04 Source: Bank of Namibia Research Department (2001). 3.34 In total, the combined population of the “neglected� and “severely neglected� regions accounts for about 62 percent of the Namibian population (Kakaunga et al 2004), in line with the findings of a study from 2003, which estimated that about 60 percent of Namibians do not have access to banking services (Genesis Analytics 2003). 3.35 Furthermore, Namibian commercial banks are widely criticized for charging very high fees. Since interest rate spreads have declined by about 300 basis points since 2001 (spreads are currently equal to 4.6 percent, a level that is much lower than other Sub-Saharan African countries, and comparable to the OECD level of 4.1 percent), fee income increased from 23.7 36 percent to 32.7 percent during the same period. This may provide a partial explanation for the banks’ fees. About 90 percent of high-income bank customers do not pay any fees or commissions, therefore banking fees are mostly collected from the middle and low-income bank customers (World Bank and IMF, 2006). 3.36 A survey conducted recently by the Bank of Namibia’s Banking Supervision Department, found however that fees in Namibia were slightly higher than in South Africa partially due to South African banks’ more diversified product lines generating higher returns (Bank of Namibia Research Department 2001). 3.37 One major reason why SMEs are not able to access loans from commercial banks is the lack of access to banking services. Generally, the regions where the banks have not established their presence are also the regions where SMEs tend to have the lowest loan accounts. Unfortunately, some of these regions also have the highest population density. Table 3.4: Commercial Banks Loans to SMEs by Region Regions Total Loans to Total number of Population No of Bank SMEs (N$) loan accounts of branches SMEs Caprivi 524957 5 79852 3 Kavango 3468689 61 201093 3 Otjozondjupa 45597639 710 135723 11 Oshikoto 7921484 247 160748 4 Oshana 36232812 813 161977 8 Ohangwena 155000 5 227728 2 Omusati 1921928 45 228364 0 Kunene 8727401 169 68224 4 Erongo 61698107 1217 107629 13 Karas 18977352 452 69677 16 Hardap 9864725 417 67998 5 Omaheke 11170291 290 67496 2 Khomas 243352344 5775 250305 19 449612728 10206 1826814 90 Source: Bank of Namibia 3.38 In addition to the issue of access, the issue of collateral played a crucial role in SME access to bank credit. Commercial banks insist on the “strict� form of collateral (insurance, salary/income, investment guarantees), which the SMEs cannot afford. The less formal forms of collateral such as savings and physical assets are less often required. It has to be understood that from the perspective of the banks, the strict form of collateral enable the banks to cushion themselves against default risk. Commercial banks claim that they have experienced substantial defaults from SMEs. In 2003, the default rate was put at 20 per cent (BON 2003). 37 3.39 One other factor that militates against SMEs borrowing from commercial banks is high lending rates. Most commercial banks lend to SMEs at Prime rate plus 2 to 4 per cent. The rate varies from bank to bank. While this might look high, the rate is substantially below what SMEs obtain from micro lenders whose rates hover around 30 per cent or more in Namibia. The fact that SMEs patronize most of these micro lenders tends to weaken the argument on high lending rates as a deterrent to borrowing29. 3.40 In an effort to encourage bank lending to SMEs, the government introduced the Small Business Credit Guarantee Trust (SBCGT) scheme. To benefit from this scheme, SMEs are expected to provide some information such as “bankable� business plans, ability to provide a 10 per cent deposit, personal financial statements, proof of business registration, bank records, guarantee and adequate collateral. It is obvious that some of these requirements might be too strict for SMEs especially the informal ones who are either not registered with the Ministry of Trade or don’t have bank accounts. Thus, it is not surprising that many SMEs can not take advantage of this scheme and continue to face difficulties in accessing credit. 3.41 The recently completed ICA30 for Namibia notes SMEs perceive access to finance as an important constraint to investment. However, the report also notes that access is easier for SMEs in Namibia compared to many countries, including Botswana and Swaziland. Conclusion 3.42 Savings rate is high in Namibia and does not appear to be a constraint. Credit indicators have improved substantially after independence. While weaknesses exist in the financial sector and SMEs do face access issues, there is not sufficient evidence to prove that credit is a binding constraint to investment and growth. B. SOCIAL RETURN TO FACTORS OF PRODUCTION Rewarding Scarcity Through Returns to Education 3.43 Rates of return to education in Namibia seem to reflect a severe scarcity of skilled labor. Recent evidence suggests that, due to the low quality of education in Namibia, a large number of students do not achieve the academic performance required to continue their formal studies and are left with no other alternative but to simply drop out from school. As a result, the Namibian labor market is reportedly bloated with young adults who lack meaningful schooling skills which are valued by labor demanders. Many vacancies remain unfilled for long time spells due to a lack of applicants with the required skills to fill them, while the unemployment rate remains high. This state of affairs characterizes an excess demand for skilled labor which is reflected in the extremely high rates of return to education for higher levels of schooling (34 percent for post-secondary education) as compared to those observed for lower levels of education (2 percent for incomplete secondary education), as previously noted by empirical research conducted by the World Bank (see World Bank, 2005b) 3.44 There is evidence that ‘out of school’ factors are important determinants of productivity and future wages in Namibia. Godana and Ashipala (2006) have used the pupil- teacher ratio (PTR) as an indicator of the quality of resources in a school and have confirmed that 29 It is also possible that SMEs patronize moneylenders because they do not have access to commercial bank loans. 30 The main sources of information for the ICA (World Bank, 2007) are two firm level surveys - one covering small, medium and large enterprises and the second covering micro enterprises with less than five employees. 38 the PTR has a negative impact on returns to education.31 School resources available (measured by teachers and their qualifications) during schooling years were also found to have very little effect on future wages. Further analysis showed that household characteristics measured by the mother’s level of education and household assets where an individual grew up had a significant impact on educational performance. The return to education by years of schooling was found to increase significantly when individual and home characteristics were reflected in the measure of the quality of education. This, as stated in the study, is a strong indication that the quality of education an individual receives can also be greatly affected by ‘out of school’ factors. 31 The study was based on an extensive and representative national survey of individuals and collected information on the level of different school resources. The survey was carried out in all 13 regions in Namibia and interviewed 1,168 individuals in various towns, villages and settlement areas. 39 Box 2: Education and Human Capital After independence, Namibia has put great emphasis on increasing access to education and training. Namibia is currently one of the biggest spenders on education and training in Africa spending about nine percent of its GDP in 2002/03 (World Bank, 2005). About 80 percent of the population is literate, and nearly 90 percent of children of eligible age are enrolled in primary schools. By 2001, the gross enrollment rates (GER) were 115 percent, 69 percent, and 11 percent for primary, secondary, and tertiary education and training, respectively. While Namibia’s primary GER and net enrolment rate (NER) compare reasonably well with other countries substantial proportion of urban (40 percent) and rural (59 percent) dwellers only have primary education as their highest level of educational attainment. About 12 percent of the population has never been to school. According to the Southern African Consortium for Monitoring Education Quality (SACMEQ), the performance of Namibian primary school children in reading and mathematics test has been persistently lower than that of children in the rest of SADC countries. In 2000, only a third of students enrolled in grade one completed secondary school. Access to pre-primary education is limited in rural areas and in 2001 only 41 percent of students from northern regions attained the minimum score required to enter senior secondary school, against the 63 percent registered as a country average. General education is ineffective and its quality extremely low, mainly because of inadequacies in a range of education quality-enhancing inputs. Lack of access to early childhood development (ECD) and preprimary education programs result in 80 percent of children entering the 1st grade of primary education without the required level of learning readiness. According to SACMEQ survey on reading literacy and mathematics, in 2000, student performance in reading literacy and mathematics was on average worse than for all compared countries in the region. The standard errors are not among the highest, which is a good sign. All the same, as the below table shows, there is in Namibia a relatively even distribution of mediocrity. Reading and Mathematic tests score (mean and std. deviation) 2000 Source: UNESCO and SACMEQ, 2000 3.45 Unemployment in Namibia affects mostly unskilled workers. According to recent econometric estimates by the IMF, those with a bachelor’s degree in the US, for example, earn about 2.88 times as someone without a college degree (see IMF, 2006). In Namibia, the data 40 reveals that the relative difference between the two groups is about 28 times. In addition, US evidence implies that the possession of a college degree increases the probability of being in the labor force by nearly 23 percent over a high school graduate; for the OECD as a whole the increase is around 17 percent. In the case of Namibia, the difference in probabilities between the two groups is close to 35 percent. Therefore, unlike in OECD countries, where unemployment also affects white collar workers (Levine, 1998), unemployment in Namibia is mainly concentrated among the less educated, becoming increasingly rare as education levels rise. 3.46 Earlier analysis by the World Bank underscores the comparative advantages of workers who have completed at least secondary education. Data was collected in 2003 from a nationally representative sample of 2,500 individuals over the age of 15 and not attending school reveals that: (i) wages are much higher in urban areas than in rural areas; (ii) gender inequalities in wages are significant; (iii) wages in the public sector are significantly higher than in the private sector; (iv) people with primary education and an incomplete secondary education have very similar wages; and that (v) wages are much higher for those with secondary education, tertiary education, and training. These patterns are confirmed by econometric estimates of the rates of return to schooling based on the same data set (World Bank, 2005b). 3.47 The returns to primary and to incomplete secondary education are extremely low. This may be indicative of the low quality of education received by those in the labor force today, and also a legacy of the apartheid regime in the past. The returns to secondary and post-secondary education are very high, 28 percent and 34 percent, respectively. These returns are found to be higher than for the Sub-Saharan Africa average of 27.8 percent. In addition, the returns to additional years of education are much higher for younger people, those between 15 and 35 years of age (15 percent), as compared with those for people older than 35 (9 percent). Furthermore, returns to an additional year of education were actually found to be higher in the private sector (12 percent) than in the public sector (10 percent); the male bias in wages was found to be stronger in the private sector than in the public sector; and the urban bias in wages was also found to be stronger in the private sector than in the public sector (World Bank, 2005). 3.48 The shortage of skills is also translated in wide wage disparities in the Namibian labor market. Given the skewed distribution of skills and employment opportunities in Namibia, and the fact that the unemployed and unskilled are not always organized and protected by a union, actual remunerations tend to be widely dispersed among different types of occupations. The median values for monthly wages by job categories are very distant from a position of manager, for example, and a production worker (see Figure 3.3 below). Furthermore, there is a large difference between the highest median wage and the lowest median wage received by a manager, for example.32 The intra-occupation disparity may be associated with the sector of affiliation of a given employee or manager. On the other hand, the apparent convergence between the median high wages and the median low wages for the bottom end of the wage distribution, i.e. production workers, suggests that the less skilled workers are available in greater numbers and that their salaries tend to be close to the market-clearing level which is regulated by the forces of demand and supply. 32 This point is made in the background paper prepared by Napembe et al. (2006, p. 19). The main idea is to highlight the existence of wage differentials within each occupational category. 41 Figure 0.3: Wage Disparity Intra and Inter-Occupations Monthly Wages by Job Category 30000 25000 20000 N$ 15000 10000 5000 Median High Wages Median Low Wages 0 Managers Supervisors Technical Office Support Production Support Workers Source: The Business Survey (2003) 3.49 Estimates of the social rates of return to schooling confirm the relative advantage in the labor market of those who have completed secondary education. This method calculates the internal rate of return (IRR) to education which takes into account all the costs associated with education, including out-of-pocket private expenses as well as government subsidies. The IRR is the discount rate that equates the discounted value of costs and benefits of a particular level of education. The results of this exercise show that: both the private and social IRR are quite high for all levels of education, except for completing primary education; although an additional year of education at the primary level has no effect on wages, completing primary education does have a positive impact on wages; similarly, an additional year of secondary education has a very low rate of return, while completing that level of education has a high private and social rate of return; and finally, the private IRR on post-secondary education is much lower than the estimated rate of return, partly because of the high private costs of that level of education. 3.50 The small positive rate of return to completed junior secondary education is an indication that those with this level of schooling are employable, but they will have low wages in the labor market. In trying to actually realize economic benefits from its investment in human capital, Namibia should focus on the difference between a 6 percent return for completed primary education, and the rate of return to junior, and to senior secondary education. 3.51 Shortage of skilled labor appears to be at present one of the most significant constraints on economic growth. It limits the capacity to apply knowledge and technology in production, constrains productivity growth, reduces profitability and investment returns, encourages domestic capital flight and hampers Namibia’s international competitiveness. Though labor productivity has grown in Namibia, at least more than in neighboring SACU countries, productivity levels continue to be below those in South Africa and there is an acute shortage of skilled labor, especially in the area of technology. In mining and manufacturing, where productivity has risen the most, Namibia compares favorably with South Africa, but labor productivity growth has lagged in services sectors where the workforce should be better trained and high skills are normally required (IMF, 2007). The ICA results also reflect that worker skills and education are perceived as a constraint on investment. 42 Conclusion 3.52 The above evidence suggests that education and training in Namibia is a key constraint to attaining economic growth and equitable development. Geography and Infrastructure 3.53 Namibia’s geographical location constitutes a significant natural advantage for it becoming a transport and export hub for the SADC region. Strategically located half way down the coast of Namibia, with direct access to principal shipping routes, Walvis Bay33 is a natural gateway for international trade. Excellent sub-regional highways, such as the Trans- Kalahari and the Trans-Caprivi Highways, make the Walvis Bay port easily accessible to SADC countries and to central African countries. These highways are complemented by the Walvis Bay corridor which has the potential to connect with the Maputo corridor, and to further broaden business opportunities. For a country whose limited local market is a real constraint to growth, it is significant to have easy access to markets offered by the nearly 200 million SADC citizens, and potentially more in central Africa. The potential of Walvis Bay port is beginning to be realized. In 2001, Namibia was the fifth-largest destination of U.S. exports to Southern African countries— Botswana, South Africa, Angola, and Zambia. European shipping lines are also beginning to establish Namibia’s Walvis Bay as the first port of call in Southern Africa. 3.54 The ICA confirms that infrastructure is not considered as a constraint by enterprises. Less than one in 10 enterprises with 5 employees or more rates any aspect of infrastructure as a major concern. Over half of micro enterprises in Namibia also reported access to basic infrastructure services such as electricity, water, and public sewerage connections. 3.55 On the strength of good infrastructure, tourism has grown rapidly in Namibia. There are now four international airlines operating scheduled flights to Namibia34 bringing visitors mainly from German-speaking European countries (Germany, Switzerland, Austria). The bulk of tourists continue to visit the country’s national parks. The current structure of Namibia’s tourism sector is characterized by a large number of small and medium sized firms, including tour operators with one or two vehicles and guest farms and lodges with five to eight rooms. While Namibia’s tourism sector continues to be dominated by (approximately 250) general purpose tour operators based in Windhoek offering coach tours, the market for self-drive tourists has grown rapidly facilitated by Namibia’s extensive road network. Conclusion 3.56 The geography and the infrastructural endowment of Namibia are not considered to be binding the country’s economic growth. C. PRIVATE APPROPRIABILITY 3.57 The remaining component of the decision tree relates to low approprability constraints. Low private returns to investment could result from a number of factors, including: (i) high macro risks (ii) micro risks related to the rule of law, economic freedom and the investment climate in general; (iii) labor market rigidities; (iv) fixed exchange rate regime; and (v) anti-export bias and dependence on tariff preferences. The analysis below shows that macro 33 It is however, not yet a port of origin and exports are routed through Cape Town. 34 Air Namibia, South African Airways, LTU and BA/Comair. 43 and micro risks do not impose a significant burden. However, the remaining constraints do impose a significant burden on investment, export diversification and growth. 3.58 As a member of SACU, Namibia’s key macroeconomic fundamentals reflect South Africa’s macroeconomic policy, with the exception of fiscal policy. Generally, the macro policy environment has been conducive for growth. Macroeconomic performance has been strong and real GDP growth is estimated to have risen to 4.6 percent in 2006, up from 4.2 percent in 2005, mainly driven by recovery in diamond production in 2006. Consumer price inflation rose in 2006 to 5 percent, closely following trends in South Africa, from 2.3 percent in the previous year. Average inflation had declined steadily since 2002, but recent increase in imported food prices from South Africa reversed that trend. The external current account surplus is estimated to have doubled in 2006, to 14 percent of GDP compared to 7.2 percent in 2005. Sound macroeconomic policy stance has received international recognition as also reflected in receiving a sovereign credit rating by Fitch Ratings, an outcome driven by the pursuit of sound macroeconomic policies. Rule of Law, Economic Freedom and the Investment Climate Corruption and Human Rights 3.59 Namibia is relatively well placed compared to other Southern African countries in the Transparency International’s Corruption Perceptions Index. It was ranked 55th in 2006. There is a growing civil society, including a chapter of Transparency International, the Namibia Society for Human Rights, the Namibia Democratic Institute, and the Media Institute for Southern Africa (MISA). Namibians are mostly content with their government and its responsiveness to their needs. Reportedly, the government enjoys the trust of the people and Namibia ranks high among the free countries in Africa and relatively well worldwide. 3.60 There is a fairly decent track record of respect for human rights. The 2002 Freedom House survey ranked Namibia among the 86 “free� countries in the world, only 9 of which are African countries. Ratings for freedom of the press have declined from “free� between 1994 and 1998 to “partially free� between 1999 and 2000, but the scores were still very close to those for free countries (34 and 38, where the score ranges from 31 to 60). On a range of 1 to 7, the 2001 World Democracy Audit gave Namibia favorable scores of 2 and 3 for political and civil liberties, respectively. Though not without setbacks, social cohesion initiated during the independence struggle is steadily being consolidated. Doing Business and Investment Climate 3.61 Sound liberal economic policies considered to facilitate growth have been pursued since independence. Relative to other African countries, Namibia scores well on indices of economic freedom, such as those published annually by the Heritage Foundation, the Wall Street Journal, the Fraser Institute, and the Cato Institute. Ratings are particularly high on variables relating to: low barriers to capital flows and foreign investment; low government intervention on wages and prices; protection of property rights; financial markets; internal exchange freedom; and price stability. Yet, Namibia does not do well on government expenditure and on trade protectionism. Government expenditures for the 2001/02 budget were nearly 40 percent of the GDP. Low scores on trade protectionism are mainly due to barriers imposed by Namibia’s membership to the SACU, rather than to internal regulatory frameworks. 44 Table 3.5: Doing Business Ranking out of 175 countries Ease of… Namibia Botswana Lesotho South Swaziland Africa Doing business 42 48 114 29 76 Staring a business 86 93 113 57 112 Dealing with licenses 19 136 75 45 16 Employing workers 44 62 91 87 47 Registering property 127 34 129 69 140 Credit 33 13 117 33 21 Taxes 28 67 44 74 38 Trading 144 89 121 67 133 Enforcing contacts 64 77 130 43 132 Closing a business 42 22 57 65 56 Source: World Bank (2007). 3.62 Namibia performs relatively well in terms of Doing Business Indicators 2006 and is ranked 42nd in the world (and third highest in Africa). Its investment climate is strong compared to BLS countries and the investment regime continues to be liberal; the number of procedures (10), time required (95 days), minimum capital needs (0) and cost (18.8 percent of per capita income) compare very favorably with regional averages. There are no significant restrictions on private sector development and, in terms of ease of hiring and firing, Namibia compares favorably with OECD averages and highly favorably with regional averages. The “Doing Business in 2006� reports an overall rigidity of employment index of 27, compared with the regional average of 53.1 and OECD average of 36.1. The firing costs are relatively low: 24.2 weeks of wages in Namibia, compared to a regional average of 53.4 and OECD average of 35.1. According to Doing Business 2006, the difficulty index for firing workers, for instance, is 20 compared to a regional average of 47.8 and an OECD average of 27.4. It takes 9 procedures in Namibia to transfer a property title from the seller to the buyer against a regional average of 6.9 and 4.7 for OECD countries. However, it takes only 28 days to register property, compared with the regional average of 118 and the OECD average of 32. The cost to register, 9.3 percent of the property value per capita is lower than the 12.7 percent regional average, but much higher than the 4.8 percent OECD average (World Bank, 2007). 3.63 The relative ease of doing business is also reflected in the ICA for Namibia. Firms have few complaints about infrastructure and most aspects of regulation. However, firms in Namibia were more likely to say that crime was a serious problem. The objective data collected in the investment climate survey also suggests that crime is a serious problem. Although firms reported lower per worker costs than in the very worst performing countries, crime and security costs are a greater burden on firms in most of the SACU economies than in the comparators from outside of SACU. The burden tends to be largest for firms in the retail trade sector and for firms in Windhoek. 3.64 While firms are concerned about the burden of taxation (ICA, 2007), the Namibian incentive system is overly generous and complex (FIAS, 2006). The Namibian tax system is characterized by seven corporate income tax rates and the existing incentive structure may leave room for tax abuse such as transfer pricing, financial transfers, mischaracterization of business activity, and churning “new� businesses to qualify for incentives. Furthermore, at 35 percent Namibia’s general corporate tax rate is quite high by regional standards. Botswana (25 percent), South Africa (29 percent), Malaysia (28 percent), Mauritius (25 percent) all have significantly 45 lower corporate income tax rates. Several other African countries have a 30 percent corporate income tax rate – among them are Madagascar, Rwanda, Ethiopia, Tanzania, and Kenya. Although the base rate for the corporate income tax is relatively high in Namibia (35 percent), generous investment incentives reduce this burden significantly. In particular, depreciation rates and schedules are generous and firms can carry unlimited losses forwards. As a result of these and other provisions, the Doing Business report finds that the average effective tax rate is lower in Botswana than in most of the comparator countries. 3.65 Given the importance of the manufacturing sector for Namibia, the Government offers tax and non tax incentives to qualifying manufacturers. Such registered manufacturers (new and existing) benefit from a package of tax and non-tax incentives, applicable to existing and new manufacturing enterprises. Tax based incentives include a reduced corporate tax rate of 18 percent; an exemption on purchase and import of manufacturing equipment and machinery; a special building allowance, which permits factory buildings to be written off at 20 percent in the first year and the balance at 8 percent for 10 years. Furthermore, a transport allowance (writing off 25 percent of land-based transportation costs) is included; an export promotion allowance, which permits an additional deduction of 25 percent from taxable income; and a training deduction of up to 125 percent of training costs related to manufacturing activity. In terms of non- tax based incentives, registered manufacturers are entitled to financial assistance for industrial studies and export promotion activities; in the latter case, manufacturers can apply for grants of up to 50 percent of the direct costs of approved export promotion activities. 3.66 Firms in the EPZ regime also enjoy special incentives and are exempt from paying import duties and VAT on machinery, equipment and raw materials imported into Namibia for manufacturing purposes, which is normal international practice. They also benefit from a 0 percent corporate income tax rate (which appears to be out of compliance with WTO requirements and could therefore trigger WTO legal actions). 3.67 The tax-based incentives are neither serving as a catalyst for start-up of new firms, nor encouraging existing business to undertake additional investment in new technologies of expansion of product lines. These problems arise mainly because tax burdens (i.e. low after-tax profit rates) are not the primary obstacle to investment in Namibia. The bigger obstacles are those that reduce pre-tax profits (e.g., shortage of skilled labor) and increase perceived risk (e.g., uncertainty about protection of property rights). In addition, there is also uncertainty around the interpretation of the qualification criteria. Similarly, after more than ten years of operation, the Namibian EPZ regime has had less than impressive results in terms of meeting the stated objectives of attracting investment, creating jobs and promoting exports in Namibia. According to FIAS (2006), as of the second quarter 2006, total employment in EPZ firms represents less than 15 percent of employment in the manufacturing sector, which itself has not performed up to expectations for formal sector employment. Job creation via EPZs has therefore not offset, as had been hoped, the decline in agricultural jobs. 3.68 Business Licensing. Managers of SMLEs in Namibia complained little about business licensing. Microenterprise managers, however, often saw it as a serious obstacle. Compared to the comparator countries, it takes a long time to start and register a business in Namibia. Although the computerization of the registrar of companies should speed up the process, the time will remain higher than in the best performing economies. 3.69 Access to land. Although few SMLEs rated access to land as a serious obstacle, many of the microenterprises saw it as one. Very few of the microenterprises owned their own land and 46 renting land was costly for those firms that did not own their land. The monetary cost of transferring land is relatively high, but the time cost is relatively modest. 3.70 Investment legislation. The overall legal framework for investment in Namibia is outdated. Government of Namibia is concerned that its investment legislation is obsolete and its regime of fiscal incentives is ineffective and wasteful. The Foreign Investment Act (FIA) needs to be replaced as it does not cover a number of important aspects that a potential investor may look for (or at least expect reference to) in an investment law. In particular the current FIA does not state the Government’s overall policy or approach regarding investment and does not clearly guarantee that the business environment is protected from sudden changes on the basis of political expediency. There is a lack of other incentives for investors and misses access to expatriate labor. It does not cover access to land use rights and does not include a specific negative list of prohibited activities; there is no explicit specification of the role of investment authority. 3.71 According to FIAS (2006), investors in Namibia, both foreign and domestic, find that the biggest impediments to investment are the shortages of skilled labor and perceived risks concerning protection of property rights. Addressing these issues will be critical for Namibia’s quest to increase its rate of investment. Conclusion 3.72 Overall, despite the fact that the situation can be greatly improved, Namibia has a satisfactory record when it comes to respect for law, a relatively flexible regulatory environment and performs well in terms of economic freedom and respect of human rights. These factors can therefore not be considered binding constraints on investment and growth. Labor Market Rigidities 3.73 Labor markets in Namibia present a highly dichotomous structure which is characterized by severe segmentation. First, there is a high-wage urban sector (public and private) in which labor is organized by trade unions. The ICA finds that median monthly wage for full-time production workers in Namibia is over three times higher than in most low income countries in sub-Saharan Africa. Relatively high wages despite higher labor productivity acts as a brake on competitiveness. Second, the rural subsistence sector includes unskilled workers, whose incomes are just 7 percent of those of semi-skilled workers and less than 1 percent of those of senior managers in the urban private sector. This dichotomy illustrates a severe segmentation in the labor market where the gap between those in high-productivity, high-pay jobs and those in precarious low-productivity, low-pay jobs is almost exclusively explained by supply-side factors (formal skills, training, work ethics, and cognitive skills). 3.74 Namibia does not differ significantly from the average of SACU and SADC countries in the World Bank Doing Business labor market indicators. Looking at the Doing Business indices on the difficulties of hiring and firing workers, rigidity of working hours, and rigidity of employment, there is no apparent reason to think that there are significant labor market issues in Namibia vis à vis other comparable African countries. The only apparent particular concern is focused on the rigidity of employee working hours, as the trend in Figure 3.4 shows that Namibia is more rigid when compared to SACU. This rigidity has, however, remained constant in 2006 after a slight increase in 2005. But rather than showing a rosy picture, these indicators might just 47 be hinting at the possibility that the real problems may lay in areas which are not actually captured by the Doing Business surveys. Figure 0.4: Rigidity of Working Hours Rigidity in Firing of Labour 60 50 40 SADC SACU Index 30 Namibia 20 10 0 2004 2005 2006 Year Source: World Bank and International Finance Corporation (2004, 2005, 2006) Figure 0.5: Rigidity in Firing of Labor Compared Rigidity in Firing of Labour 60 50 40 SADC SACU Index 30 Namibia 20 10 0 2004 2005 2006 Year Source: World Bank and International Finance Corporation (2004, 2005, 2006) 48 Figure 0.6: Rigidity of Employment Compared Rigidity of Employment 60 50 SADC 40 SACU Index 30 Namibia 20 10 0 2004 2005 2006 Year Source: World Bank and International Finance Corporation (2004, 2005, 2006) 3.75 Labor relations remain abrasive35.in Namibia. The Namibian labor market is characterized by extremely high urban and rural unemployment rates almost exclusively affecting the youth and the unskilled; significant underemployment; rising informality; and abrasive relations between employers and employees. These outcomes may be driven by shortcomings associated with (i) the current set of labor legislation; and (ii) the quality of the labor force (discussed in the pervious section). In addition, another inhibitor to employment creation quoted by stakeholders was the lack of entrepreneurial skills of the Namibian economic active population. The cost of labor, as measured by the total cost of labor taxes and social contributions as a share of the total wage paid by the employer, was quoted in the private sector as varying between 20 percent and 40 percent and does not seem to concern employers as a significant impediment to job creation. 3.76 The abrasiveness in labor relations is seen as an important contributor to hysteresis in the labor market. In what concerns the impact of labor market legislation on labor market outcomes, the most apparent problems are related to the burden associated with retrenching labor, the difficulties to hire part time labor and expatriate workers, and the ineffective conflict resolution system which is still in place. As a consequence of these shortcomings, employers prefer to keep a smaller and more stable set of employees that does not change much either in times of economic expansion or in periods of economic contraction, thus contributing to the creation of significant rigidity in the Namibian labor market and persistence in unemployment. 3.77 Unemployment hysteresis may arise in a context of a unionized labor market. In the extreme case of the insider-outsider hypothesis, for example, insiders are both insulated from downward pressure on wages by outsiders and unconcerned about the welfare of anyone but those currently employed in the firm.36 Therefore, an adverse shock which reduces employment leads to a reduction in the number of insiders, who in turn set wages which validate the new lower level of employment. Employment would thus follow a random walk: employment and 35 The assessment in this section is based on stakeholder consultations that were held by a World Bank mission to Namibia in 2006. 36 See Lindbeck and Snower (1988) for a seminal contribution on the insider-outsider theory. 49 unemployment would not tend to return to their original values. Although this is the extreme case of the insider-outsider hypothesis, it suggests that adverse shocks could lead to persistent unemployment and to a low rate of employment growth. The insider-outsider phenomenon, by impeding the employment of new entrants, could also lead to high youth unemployment. Furthermore, the insider-outsider theory could explain high rates of unemployment. 3.78 Union density rates in Namibia are high and unions exist in greater numbers in the public sector and in urban areas. Union density rates in Namibia have remained fairly constant at around 25 percent since the mid-1990s, according to the NLFS conducted in 1997, 2000, and 2004. This level of union density compares with those found in industrialized countries such as Japan, the Netherlands, German, and Spain.37 Union density in Namibia is also more than twice as high in the public rather than in the private sector, and is much higher in urban rather than in rural areas. Union density is also higher in sectors such as fishing, mining and quarrying, public administration, defense and social security, education, and health and social work. This is consistent with evidence presented earlier that shows that unemployment is higher for workers in rural areas and for those in the private sector in urban areas. 3.79 A second possible channel through which unemployment hysteresis may arise is through the composition of the pool of job seekers. According to this hypothesis, the longer someone is unemployed the more detached he/she becomes from the labor market and the less effective he/she will be in searching for employment. Those who experience a long period of unemployment may lose their human capital through enforced inactivity and thereby become less attractive to employers. The long-term unemployed may also become less active job seekers if the unemployment benefit system does not provide adequate incentives to seek employment.38 In the case of Namibia, this hypothesis appears to be very plausible given recent developments and labor market outcomes (the proportion of unemployed reporting more than 24 months of unemployment has increased from 1997 to 2004 as shown in Chapter 2). Furthermore, this situation is aggravated in Namibia because the large majority of the population lives in rural areas, is available to work, but are not actively seeking employment simply because they do not know where to look for employment or because there are no jobs available where they live. 3.80 One of the responses to these constraints that is growing in importance in Namibia is the appearance of labor hire companies. A conjunction of legal, social, economic and political relations have facilitated a drastic expansion of temporary employment agencies in post- independence Namibia. The industry (know as ‘labor hire’) is exploring a niche left by the limits in regulatory coverage and provides businesses with a whole range of labor services that vary from highly skilled technicians to unskilled manual workers (Klerck, 2002). These workers are paid by the employment agency or labor broker and only have employment with the agency or broker for as long as the contract with the client company lasts. While some of these workers are employed in a quasi-permanent capacity, there is generally an ex ante regulation of job tenure and terms of employment. 3.81 Temporary employment agencies experienced remarkable growth in Namibia from the mid-1990s onwards. In part, this reflects an attempt by employers to evade their (post- independence) statutory obligations by seeking out new sources of labor to take over the burden – so long carried by the migrant labor system – of providing a ‘flexible’, socially-disadvantaged, and strictly controlled workforce. A steady supply of ‘willing’ workers, implicit deregulation, and 37 For a cross-country comparison of union density rates, see Aidt and Tzannatos (2005). 38 Layard and Nickell (1986) and Nickell (1987) find support for this hypothesis. 50 the virtual absence of statutory and collective controls on the use of non-standard employment in Namibia are highly favorable to the expansion of agency-mediated temporary employment. Although these agencies are concentrated in the major industrial centers (Walvis Bay, Swakopmund, Luderitz and Windhoek); they are also found in industrial (mining) towns such as Arandis and Tsumeb. 3.82 The labor hire companies supply a range of skilled and unskilled labor on a temporary basis to local businesses. The temporary employment industry in Namibia is dominated by one large company that employs about 1,500 workers countrywide on a semi- permanent basis in addition to the numerous workers hired out on a daily basis as demand dictates (LaRRI 2000:5). The other temporary employment agencies are considerably smaller and limited in their operations to specific towns, companies and skill categories. Some of the smaller agencies, for example, deal exclusively in the supply of temporary workers to one large firm (usually a mine). Semi- and unskilled workers constitute the bulk of the employees hired to private companies and parastatals. However, most temporary employment agencies also supply a whole range of skilled personnel and a few even specialize in the provision of skilled labor on fixed-term contracts. 3.83 As the labor hire industry expands rapidly, there are legitimate concerns about compliance with labor rights. The temporary employment agencies in Namibia provide firms with temporary employees to meet labor requirements where permanent staff are on leave, absent or sick, to carry out irregular or unforeseen tasks, and to expand the workforce during special projects. In these situations labor brokers do not necessarily replace permanent jobs, but satisfy employers’ special or exceptional labor needs. However, there is a growing trend whereby whole departments are being outsourced to external agencies. In these cases, standard employees either lose their jobs or find themselves in an employment relationship that is inferior in most respects to that which they enjoyed as permanent workers. Given the fragmented structure of the temporary employment industry in Namibia, however, there are invariably tensions between the (prior) formal regulation from the centre of operations and the (subsequent) informal regulation at the dispersed sites where temporary staff are deployed. These tensions stem from the fact that the temporary employment agency is deemed to be the ‘employer’ of the workers it supplies to a client firm, although it is the latter that deploys and utilizes their labor force. 3.84 The vulnerability of non-standard employees is in large measure a problem of appropriate legislation and labor market policy. Labor laws have not proved to be particularly effective in conditioning the choices made by firms in utilizing non-standard employment contracts. In particular, a lack of precision in legal terminology has led to a conflation of two distinct forms of statutory regulation. The first is how to provide safeguards against the abuses that have traditionally been associated with casualization. The second is the regulation of the temporary employment industry itself. While the latter may alleviate some of the excesses associated with agency-mediated employment, it is the former that determines the extent to which temporary workers qualify for broader statutory and institutional protection. Emphasis is sometimes placed on the limited duration of temporary employment. This is done by setting a time limit when the temporary worker acquires legislative protection akin to that of permanent employment. In practice, however, this simply encourages employers to continuously rotate their temporary staff. 3.85 Earlier attempts at regulating labor hire employment have had limited impact. The Proposed Guidelines for Labor Hire Employment and Operating Standards, circulated for discussion in 1999 by the Ministry of Labor, constitute the first meaningful attempt at regulating the temporary employment industry in Namibia. As such, the proposed guidelines attempt to 51 regulate employment practices that are already widespread. These guidelines provide for the registration of temporary employment agencies, the introduction of training programs, and the establishment of grievance and disciplinary procedures and employment records (LaRRI 2000:22-3). After some negotiations between the representatives of labor, business and the government in the Labor Advisory Council, an amended set of proposals was presented by the Ministry of Labor in August 2000. The amended proposals compel temporary employment agencies to: (a) register with the Labor Commissioner; (b) adhere to labor and other legislation; (c) register their employees with the Social Security Commission; (d) design and implement a training program; (e) promote ‘good’ industrial relations; and (f) refrain from activities aimed at replacing retrenched workers with agency-supplied workers. In addition, the guidelines set out the following, rather modest, minimum wages: N$4.70 per hour for laborers, N$5.30 per hour for semi-skilled workers, and N$6.00 per hour for skilled workers. By the late-1990s, most semi- and unskilled temporary laborers earned slightly less than these minima, while skilled temporary workers earned considerably more. 3.86 These regulations have not limited the proliferation of temporary employment agencies. Firstly, the agencies are only required to provide their employees with benefits such as pensions and medical aid ‘where possible’. Given the nature of competition in the temporary employment industry, the provision of benefits will only be ‘possible’ if it is made mandatory for all agencies. Secondly, while the regulations provide for the training of temporary workers employed on a ‘regular basis’, they do not define what constitutes such employment. The employment agencies are thus largely free to decide who will benefit from training. Thirdly, the provision that aims to prevent the replacement of permanent employees with agency-supplied employees is exceedingly difficult to enforce. Employers may, for example, eliminate permanent jobs vacated through natural attrition with the use of temporary employment agencies. Fourthly, the regulations would have been much more effective in preventing abuses if equality of treatment and joint and several liabilities were imposed on all parties involved in work arrangements that depend on the services of intermediaries. Finally, the regulations do not provide any limitations on the period for which an employee can be regarded as ‘temporary’ or ‘casual’. Employers can therefore use the services of agency-supplied workers for an indefinite period and are under no compulsion to create permanent employment39. Conclusion 3.87 Inefficient functioning of the Namibian labor market on the demand side as well as on the supply side, and on the institutional side imposes serious challenges on the creation of employment and growth. Exchange Rate Regime 3.88 The Namibian dollar is pegged at par to the South African Rand. The peg has helped to maintain macroeconomic stability with inflation reaching its lowest level at 3.5 per cent in 2004. The peg has also helped in integrating the Namibian economy to that of South Africa with benefits for the promotion of trade and financial development. Debate surrounding the fixed exchange rate regime as a result of Namibia’s membership in the CMA reveals mixed arguments in favor of and against the current regime. There is a view that being a small open economy, Namibia’s exchange rate policy should primarily be directed towards the achievement of price stability. The dominance of imported inflation in the overall inflation of small-open economies, 39 Since this analysis was done, a new Labor Act 2007 has been passed in January 2008 that does not permit labor hire companies any more. However, the Act has not yet been implemented and its impact remains to be seen. 52 such as Namibia, implies that exchange rate stability would be necessary for the achievement of price stability. This is because the exchange rate volatility resulting from a free float would immediately be passed on to prices in such economies. In this regard the fixed exchange rate is generally recommended, as it will provide the necessary nominal anchor for inflation. Many, small-open economies with a dominant trading partner tend to adopt a single peg. The assumption here is that pegging to the SA Rand is optimal as long as SA pursues appropriate policies to ensure low domestic prices and possibly less volatile exchange rates. 3.89 However, the peg to the rand precludes the use of the exchange rate as an instrument for the promotion of export competitiveness. The idea behind the targeting of the real exchange rate is that there would be an optimal level (equilibrium) of the real exchange rate where export competitiveness is maximized. The objective of the exchange rate policy would therefore be to maintain the real exchange rate around its equilibrium level. In such a system, the nominal exchange would be adjusted if the real exchange rate is drifting away from its equilibrium position. The promotion of export competitiveness would increasingly become important as Namibia diversifies its exports structure to non resource-based products. This is necessary because if the country has to achieve high economic growth levels, given the limited size of its market, this growth would be driven by the export sector. Where there is a strong desire to foster sustainable growth through diversification and export competitiveness, the exchange rate becomes a critical variable. A problem arises if this objective is no longer feasible with the present exchange rate arrangement. 3.90 The Namibian economy is very open and very dependent on international trade. On average, the country’s exports of goods and services to GDP ratio was 48 percent between 2000 and 2006, while the imports of goods and services to GDP ratio was 52 percent. Table 3.6: Economic Openness, 2000-2006 2000 2001 2002 2003 2004 2005 2006 Exports of goods & services (percent of 45.6 45.0 49.6 51.4 45.9 47.6 52.2 GDP) Imports of goods and services (percent of 51.2 51.4 51.6 55.0 52.0 51.0 52.5 GDP) Source: Bank of Namibia (2008) 3.91 Nevertheless, Namibia has a relatively undiversified trade pattern. The bulk of the traditional exports (diamonds, zinc, copper and uranium, beef) are denominated in US dollars and the sterling while non-traditional exports and close to 80 per cent of imports are denominated or invoiced in SA rand. No doubt, pegging to the rand has helped to protect the interests of the majority of Namibia’s domestic firms, whose consumption, expenditure and revenue decisions have a significant rand component. Table 3.7 below confirms that Namibia’s exports are relatively undiversified compared to a number of sub-Saharan African countries, including Zimbabwe, Tanzania, Swaziland, South Africa, Mozambique, Malawi, Madagascar, Lesotho, Kenya, Eritrea and Djibouti. Because of these patterns (non diversified and geographically concentrated) exports, Namibia’s foreign exchange earnings are highly vulnerable to developments in the world markets for minerals, while its non-mineral exports (mainly directed to Europe and South Africa) are in turn conditional on economic conditions in these markets. Factors such as drought (affecting agriculture) and environmental conditions (for fishing) also have an impact. 53 Table 3.7: Herfindahl Index (HHI) of Export Concentration for Selected African Countries (1999-2001) Country HHI Country HHI Namibia 0.26 Malawi 0.45 Angola 0.81 Mauritius 0.12 Botswana 0.50 Mozambique 0.14 Burundi 0.64 Rwanda 0.41 Comoros 0.33 Seychelles 0.51 Congo, D.R. 0.36 South Africa 0.05 Djibouti 0.08 Sudan 0.36 Egypt 0.52 Swaziland 0.15 Eritrea 0.06 Tanzania 0.10 Ethiopia 0.43 Uganda 0.48 Kenya 0.14 Zambia 0.26 Lesotho 0.24 Zimbabwe 0.12 Madagascar 0.08 Source: Yagci and Aldaz-Carroll (2004). 3.92 While the peg to the rand has subjected Namibia to exchange rate volatility in recent years, its real effective exchange rate has remained relatively stable since Independence. Nonetheless, the rand experienced extensive periods of sharp depreciation between 2000 and 2002 and appreciation during the period 2002-2004 and depreciated again in 2006. During 2002- 04, the nominal appreciation of the Rand against the US dollar was about 38 per cent. This translates into about 12-24 per cent real effective appreciation. Namibia’s terms of trade suffered further declines during the period 2002-05 (IMF, 2005). However, Eita and Sichei (2006) find that Namibia’s REER was not affected by the terms of trade but appreciated with greater openness and investment. Recent analysis by the IMF (Miyajima, 2007) shows that REER misalignments tend to dissipate over time and that recent real overvaluation in the Namibia dollar was relatively small and was reversed in 2006 by the latest depreciation and the current level of REER does not suggest a competitiveness problem. . Conclusion 3.93 From the currency perspective, the Namibian dollar’s peg to the South African rand has contributed to macroeconomic stability of the Namibian economy and not constrained the growth performance. It has also helped in protecting the vast majority of Namibia’s domestic firms. Even though a more competitiveness-enhancing currency might well help the economy, there is no substantial evidence that the currency peg has harmed the growth performance so far and it is quite likely that the benefits that arose from such equilibrium outweigh the costs. Structure of the Common External Tariff (CET) and Tariff Preferences 3.94 A key policy constraint to export diversification in Namibia relates to trade policy. The interaction of import tariffs with rules of origin, domestic taxes and investment incentives has lead to a structure that discriminates against exports, favors capital-intensive sectors over labor-intensive ones and large firms over SMEs. 3.95 There are various channels through which trade costs (costs associated with importing and exporting such as tariffs, export taxes or transport costs) affect firm productivity and exports. 54 First, due to trade costs (most notably tariffs on raw materials and capital goods) firms may not find it profitable to export until they achieve a higher level of productivity (Melitz, 2003). At the same time, trade costs allow lower productivity firms that sell only to the domestic market to survive. A fall in trade costs, (for example, through trade liberalization) results in a reallocation of resources from low productivity firms that close down towards more productive firms, some of which become able to export, and to existing high productivity firms that are able to increase their foreign sales. Another channel through which reduced trade costs can positively affect firm productivity is through increased imports of capital goods. Goods embody technological know- how and therefore countries can also acquire foreign knowledge through imports (Coe and Helpman, 1995). 3.96 As a member of SACU, Namibia’s trade policy instruments are determined at the regional level. Namibia applies common customs tariffs, excise duties, valuation methods, origin rules, and contingency trade measures. The structure of the CET has increasingly impacted the competitiveness of Namibian firms. The common ad valorem rates (39 bands) range from zero to 55 percent with about half of the lines bearing a non-zero rate. The simple average common MFN tariff rate is 11.4 percent, but the tariff system remains complex comprising ad valorem, specific, mixed, compound, and formula duties based on reference prices40. The high levels of the SACU common external tariff compared to strongly performing countries such as Mauritius make imports of products from non-SACU countries uncompetitive (see Table 3.8). 40 Higher tariffs (above 40 percent) apply to tobacco (35-45 percent), clothing (up to 40 percent), pineapples (55 percent), tires (43 percent), beef (specific tariff equivalent to over 40 percent ad valorem), sheep and goat meat (specific tariff equivalent to over 40 percent ad valorem). 55 Table 3.8: Distribution of Tariff Lines and Imports by MFN Tariff Rate for Selected Countries SACU Madagascar Mozambique Tanzania Mauritius Malawi Chile Distribution of tariff lines (HS8-digit) % tariff lines for 54 2 2 36 84 9 1 t=0% % tariff lines for 6 22 63 0 0 31 99 t>0% and <10% % tariff lines for 19 76 0 23 8 21 0 t 10% and 20% % tariff lines for 21 0 35 56 8 39 0 t>20% Average tariffs (HS8-digit) Number of non-zero 38 3 4 8 4 5 1 tariff bands Average tariff (%) 11.4 12.9 12.1 12.8 3.3 13.5 6.0 Average tariff 3.5 10.4 7.3 4.8 2.0 8.9 5.9 capital goods (%) Average tariff raw 4.3 12.4 12.3 13.9 3.5 10.7 5.9 materials (%) Average tariff intermediate 6.5 9.2 8.8 10.3 0.9 11.1 6.0 products (%) Average tariff consumer goods 14.6 16.6 18.6 20.0 6.9 20.4 6.0 (%) Source: UNCTAD TRAINS 3.97 There are high effective rates of protection because of SACU’s cascading CET. The CET is high on final products but lower on inputs and intermediate goods. Prior to 2002 the South African Board of Tariffs and Trade assumed full responsibility for external trade policy formulation in SACU. While all countries are now represented on the SACU Tariff Board, to consider all changes in the common external tariff, Botswana, Lesotho, Namibia and Swaziland (BLNS) had to accept the pre-2002 tariff policy as starting point. This tariff regime, historically geared towards import-substitution industries in South Africa, also provides a large percentage of revenue for the common revenue pool. Consequently, while up to one-third of Namibia’s exports go to South Africa, some 80 percent (in 2005) of the country’s good imports are sourced from or through South Africa.41 Imports are mainly in the form of consumer and intermediate goods (motor vehicles, parts and petroleum), food products and inputs required for local production purposes. Namibia’s trade (both exports and imports) with other SACU members is relatively minor. 3.98 Secondly, there are still barriers to intra-SACU trade. While the SACU Agreement permits national protection for infant industries in the BLNS countries only,42 and a Competition. 41 The existence of commercial, financial and transport links with South Africa also favor South African trade. 42 Under the provisions for this, the BLNS countries can impose import duties on imports from South Africa provided that the same tariffs are also imposed on imports from the rest of the world. An infant industry is defined in SACU as an activity that has not been located in the BLNS countries for more than 8 years and the protection is also limited to 8 years. Namibia has used the provision to protect a pasta manufacturer, UHT milk production and broilers (WTO, 2003a). The tariffs were set at 10 percent for three years, 7 percent for three years and 4 percent for two years for UHT milk; 40 percent for four years, 30 percent for two years 56 Commission has been set up to oversee and intervene when necessary; however, it is not yet functioning effectively. Attempts to develop new industries in the BLNS countries have sometimes been met with the introduction of non-tariff barriers. Other times, failure to comply with South African standards have made firms uncompetitive, for example, attempts to assemble televisions in Lesotho and produce fertilizer in Swaziland. And a planned Citroen motor vehicle assembly plant at Gobabis in Namibia failed to meet regulations for the motor industry (Grimett, 1999). 3.99 Another barrier relates to the collection of statistics43 which makes it necessary to maintain customs controls between SACU member states. These internal controls restrict the flow of goods between SACU countries and add to the costs of doing business. In addition, each member state retains autonomy over issuing permits relating to imports. All imports are licensed while licensing of certain products is non-automatic (e.g. fish, meat and second-hand goods) and requires a permit from the relevant ministry (WTO, 2003a). Many customs officials do not understand the different policies and rules that the SACU member states are entitled to introduce (Draper et al., 2007). 3.100 Finally SACU countries operate different indirect tax regimes and rates that affect intra-SACU trade. Imports are subject to restrictive excise duties, levies, VAT and licensing procedures. VAT tax rates are different among SACU countries as well as certain non-tariff measures, customs procedures, standards and technical regulations, and SPS measures. Seasonal import bans on maize, maize meal, wheat and wheat flour ensure that domestic production is consumed first. Agricultural marketing arrangements are also provided for in SACU as several of the BLNS countries continue to retain single marketing channels. Each country is allowed to impose marketing regulations for agricultural products as long as such regulations do not restrict the trade of agricultural products among SACU member states. However, both emerging agricultural sectors and related agro-processing industries can be protected, which consequently provides for restrictions on intra-SACU agricultural trade. 3.101 Lack of harmonization of trade facilitation policies undermines the integrity of rules of origin in SACU. Preferential trade agreements entered into by both South Africa (with Malawi and Zimbabwe) and the BLNS countries (the interim EPA with the EU which excluded South Africa as a partner) can compromise the customs union. In particular, the EU-South Africa Trade, Development and Cooperation Agreement (TDCA), which came into effect on 1 January 2000, has had an adverse effect on Namibia. While products of domestic interest to Namibia, such as beef, have been excluded from the TDCA, Namibia (and the BLS countries) were obliged to implement reciprocal tariff preferences negotiated by South Africa on imports from the EU, without receiving the corresponding improved market access to the EU. There are also revenue losses from preferential tariffs on SACU imports from the EU. The loss for Namibia has been estimated at 9 percent of total government revenue (BIDPA, 1998), or 35 percent of its SACU receipts (Bank of Namibia, 2002). 3.102 Tariff preferences. The structure of Namibia’s exports has become dependent on tariff preferences. And opportunities to export new products, particularly agricultural products (on which EU and the US impose high tariff barriers and subsidize domestic production) to new markets have become constrained due to limited progress in multilateral trade negotiations. Because so much of Namibia’s exports are to South Africa and the EU, the bulk of trade enters and 20 percent for two years for pasta; and, 46 percent additional tariff for four years, 30 percent for two years and 20 percent for two years for broilers. 43 This is important because the revenue sharing formula is based on intra-SACU trade. 57 duty free under preferential trade agreements. Under the ACP/Cotonou Agreement Namibia exports canned and fresh fish as well as goods such as hides, skins and leather products to the EU quota- and duty-free. Beef exports are subject to an annual preferential quota of 13,000 tons, at a reduced tariff equal to 8 percent of the specific element of the EU’s composite import duty for these products. Namibia also exports seedless grapes to the EU under the Cotonou Agreement and utilizes the full annual preferential quota for ACP countries of 900 tons. While Namibia has a bilateral preferential trade agreement with Zimbabwe (signed in 1992),44 there is only minimal trade between Namibia and Zimbabwe. Consequently, MFN tariff reductions brought about by the WTO have not improved market access for the bulk of Namibia’s existing exports. The Uruguay Round brought small gains in Japan and the US (before AGOA)45 in terms of access for fish, although the major constraint in the Japanese market is not tariff (or even SPS measures as in the US market) but quantitative restrictions. The main benefit of multilateral trade negotiations would seem to be the opportunity they offer for Namibia to find new export markets for products to diversify its manufacturing base but the current Doha Round of negotiations has lost pace. 3.103 Market access for livestock – the Veterinary Cordon Fence (VCF). Apart from the above access issues related to the trade preferences, there is a self imposed market access division in the livestock sector in Namibia. The veterinary status of the Southern part of Namibia (i.e, FMD and CBPP free) means that any meat product entering the disease free area must be quarantined46. Quarantining means that animals whose meat is destined for export must be placed in an approved and inspected quarantine camp for 21 days prior to transport to the export approved abattoir. Everything that goes into these camps must also be quarantined, which includes supplementary feeds and licks. Condition and weight loss during quarantine is normal and is partially responsible for the poor quality of animals arriving at export abattoirs north of the VCF (Bennison, Silverside et al. 1998). An additional layer of cost is added to this chain after the meat has been processed in the abattoir because the frozen meat cuts ready for export through the VCF have to be quarantined for a further 21 days in cold store. Meat exported through the FMD free zone also has to be de-boned. Large, centralized quarantine camps have been constructed and are subsidized by GRN (free veterinary inspection for example and no quarantine charges), but the losses in transportation and grade are substantial47. The net result is that in 2003 only 1.7 percent of cattle North of the VCF were sold through the export abattoirs48. Considering that more than half of the national cattle herd are situated in the non-disease free area, it is not surprising that, since independence, slaughtering in the two Northern abattoirs has never contributed more than 7 percent of total Meatco throughput (see Chapter 5). 44 The only general exception in the application of the SACU Common External Tariff on Namibian imports. The agreement provides for reciprocal duty-free trade in goods, subject to rules of origin requiring at least 25 percent local content for manufactured goods with either Namibia or Zimbabwe being the last country of substantial transformation. Other eligible products include minerals, vegetables, animals and fish provided they are wholly obtained in either country. 45 While Namibia is a beneficiary under the US African Growth and Opportunity Act (AGOA), Namibia was ineligible until 2002 for the enhanced access afforded to lesser developed sub-Saharan African countries, which extends full quota- and duty-free access to the US market for clothing exports made from third country fabric until 2013. Other industries benefiting from AGOA are ostrich meat, grapes, dates, fish and handicrafts. 46 Non-meat products crossing the VCF are also affected: thatching grass trades from the Kavango River to Windhoek but does so in sealed, pre-inspected containers; all fish products and processed meat are disallowed. 47 Recent efforts to build small ‘local’ camps have helped, but many areas are too distant from camps to make formal livestock sale into this chain. 48 Accurate figures are hard to home by: these are derived by dividing those available from Meat Board for NCA abattoir throughput (Meat Board, pers comms) by the official Veterinary census figure for total livestock population for the area north of the Veterinary Cordon Fence. 58 Conclusion 3.104 The structure of CET, inherent in Namibia’s trade regime and the pattern of tariff preferences has limited the opportunities to export new products to new markets. The slow progress made to address the VCF also limits the productive expansion of potential livestock exports. IV. SUMMARY AND CONCLUSIONS 3.105 From the above analysis, two sets of binding constraints have been identified. The first relates to the functioning of the Namibian labor market. On the supply side, there are problems associated with the quality of the Namibian labor force. Inefficiency and poor quality of the education and training system; with poor outcomes from the general education system, has resulted in a widespread skills deficiency among the Namibian labor force. There is an excess supply of untrained and low skilled laborers. This is compounded by the existence of a non- diversified economic structure concentrated on minerals, fishing, and agricultural exports, which are sectors with a high degree of capital intensity, posing a serious constraint to labor absorption on a large scale in Namibia. 3.106 The second set relates to the lack of export diversification that is so critical for a small open economy like Namibia. The structure of CET, inherent in Namibia’s trade regime and the pattern of tariff preferences has limited the opportunities to export new products to new markets. The slow progress made to address the VCF also limits the productive expansion of potential livestock exports. 3.107 In addition to the above, the lack of entrepreneurship has often been cited as a fundamental reason for the lack of risk taking and engaging in business activities that can lead to better livelihoods. This can be traced back to a large extent on the lack of opportunities – particularly education – and restrictions on activities that can be undertaken by the indigenous black population during the colonial times. The Namibian Government’s pursuit of policies since Independence to improve these opportunities has the potential to make an impact on increasing employment and growth. Building Human Capital 3.108 Namibia needs to expand access to and improve the quality and relevance of education, particularly at the post-secondary level. The quality and efficiency of education at the primary level also needs to be improved. While the main constraints arise from lack of skills – a result of poor quality and inadequate access to senior secondary and tertiary education; excluding primary education from any reform process would lower the returns on reforms aimed at strengthening the quality of higher education. It is very likely that poor primary schooling has a snowball effect all along the educational system and therefore needs to be considered in any policy recommendation. In this regard, successful implementation of the Government’s 15 year strategic plan to improve education and training (the Strategic Plan for the Education and Training Sector Improvement Program) could go a long way in addressing this binding constraint. Addressing Labor Market Rigidities 3.109 There is an urgent need to deepen supply-side policy measures aimed at increasing employment opportunities for the less skilled workers. Namibian labor markets are mainly 59 characterized by structural unemployment, resulting from imbalances in the skills demanded by employers, and those supplied by new entrants into the market. Unemployment is found to be highest among the young members of the labor force. This is mainly attributed to the high drop out rates in schools, resulting in this group having low levels of educational qualification and a lack of marketable skills. Therefore, the Namibian authorities should consider deepening public policy measures that are targeted at reducing the number of unskilled workers, including education reforms that improve access and completion rates for secondary, tertiary and vocational education. 3.110 Besides addressing issues on the supply side, there is a need to take steps to increase the demand for the unskilled and adjust the labor legislation. Labor relations in Namibia are perceived as abrasive by both employers and employees. Most of the contention seems to be focused on the lack of flexibility to fire and hire temporary labor (including expatriates) and in the current set up of the conflict resolution system. As a result, the so-called labor hire companies have been growing in number and importance in Namibia, operating in a somewhat gray area of the legislation. Measures that could facilitate the hiring of unskilled labor in both the private and in the public sectors could help reduce unemployment rates at the margin (such as reducing some of the mandatory benefits like annual leave and streamlining the process of firing part time workers for economic reasons), but not significantly given the magnitude of the problem and its supply-side roots. 3.111 Labor legislation should be flexible enough to accommodate swings in economic activity and avoid capture of employment opportunities by insiders. This is clearly not the case in Namibia. An overly protective labor code usually benefits public and formal sector workers at the expense of others. In those cases, outcomes are highly unequal, and the costs to efficiency and growth are severe, especially when product markets are not competitive. The challenge is actually finding a balance between protection and flexibility. In Namibia, this will not be easy because the more vulnerable share of the labor force (the unskilled and the unemployed) is not organized enough which suggests the existence of strong vested interests in maintaining the status quo. 3.112 Consideration should be given to the adoption of a two-pronged approach to deepen labor market reform in Namibia. A two-pronged reform approach could help tackle vested interests and increase the chances of success of a labor market reform in Namibia. The first prong of the reform would actually be a preparatory step whereby the authorities should document the high costs of bad labor market policies through good data collection, analysis, and dissemination. The second prong would follow with the launching of an integrated package of measures to enhance flexibility and feasible protective mechanisms. A cross-cutting issue that should deserve renewed efforts is the quality of education that needs to improve to increase competitiveness of Namibian workers in the labor market. 3.113 The setting up of an unemployment insurance mechanism accompanied by further flexibility of labor laws seems to be warranted. Attempts to create more flexibility in the labor market have actually failed in the past, in part because of a legitimate need to fight a legacy of abuses from the era of apartheid, but in part because those currently protected see themselves as having much more to lose from reform than to gain from such a reduction in protection. And if they are also politically influential, represented by unions and with political voice, their power to block reforms may be an insurmountable barrier. Successful reforms elsewhere usually cover a range of labor market policies and are linked with social reforms in social protection systems. In the case of Namibia, the authorities should aim at measures that can increase flexibility by lowering the restrictions and costs of firing workers accompanied by the setting up of 60 unemployment insurance mechanisms, for example. Further analysis with regards to the setting up an employment insurance scheme is warranted. Export Diversification 3.114 Trade is very important to small open economies like Namibia as a key driver of growth. Technological change originates largely from abroad, in the form of imports of capital goods, exposure to international markets, learning and adoption of new technologies. But Namibia’s dependence on exports of mineral commodities has led to weak employment generation, even though increased world demand for these products has secured reasonable growth rates in recent years. Diversification into higher value-added, non-traditional exports (Chapter 5) would, therefore, provide opportunities for job creation in more labor intensive sectors while at the same time mitigating the potential future problem of declining and volatile prices for Namibia’s mining products. 3.115 The absence of diversification in Namibia presents opportunities for productivity growth through the introduction and expansion of new activities in the agriculture, fisheries, manufacturing and tourism sectors. In order to facilitate this, trade reforms would play a significant role in stimulating diversification and creating an environment conducive for increased investment. Consequently policies should be adopted that aim at deepening trade liberalization efforts in the context of SACU to improve market access for Namibia’s exporters, particularly in non-SACU markets. Reducing the complexity of the common external tariff on capital goods and removing import authorizations and bans would raise productivity and improve competition. However, reducing the common external tariff would also diminish the size of the common revenue pool. Consequently Namibia must make an informed decision on whether it is ready to forgo revenues in exchange for a more competitive industry. Sequencing trade policy reform with broad-based tax reform could help mitigate adverse revenue impacts. 3.116 .Raising the veterinary status of the area currently north of the existing VCF to the level that pertains to the South of the fence would allow enhanced market access. Apart from righting a long-felt wrong, it could allow enhanced market access for over a million cattle and nearly a million goats. It could also lead to the opening up of new livestock production opportunities, such as small-stock, feedlots and game farming (Fowler 1999). 61 erty and Inequality I. INTRODUCTION 4.1 Namibia is classified as a lower middle-income country. However, it is characterized by poverty and high level of income inequality. In particular, Namibia has one of the highest income inequality in the world. The 1993/4 NHIES data estimates the gini coefficient at around 0.7. Consequently, conventional welfare and social indicators are distorted in presenting an accurate picture about Namibia’s development. Lack of systematic data has resulted in insufficient examination of the evolution of income inequality and poverty in Namibia. The second Namibia Household Income and Expenditure Survey (NHIES 2003/4) provides an opportunity to examine the evolution of poverty and inequality in post independence Namibia. While the detailed data set is still not available for public release, the following sections attempt a limited analysis based on the available data, largely related to the expenditure side of the survey. 4.2 In line with the 2003/04 NHIES main report issued by the Central Bureau of Statistics, the poverty measure is defined in relation to household food expenditure. Households are classified as poor if food consumption makes up 60 per cent or more of total household consumption and as severely poor in cases where food consumption is 80 per cent or more.49 Household consumption includes frequently consumed items such as food and beverages but also items that are less frequently consumed such as clothing, furniture and electrical appliances, as well as an imputed rent for free occupied or owner occupied dwellings (Central Bureau of Statistics, 2006:95). According to this definition, 28 percent households are classified as poor and 4 percent of households fit the definition of extremely poor in 2003/04. These estimates reflect a significant decline in the share of poor and extremely poor households identified in 1993/94 survey (from 37.1 percent and 8.2 percent respectively). It is to be noted that the 2003/04 survey has benefited from improved methodology, better coverage and use of modern technology for data processing. Therefore, as a general rule, observed changes over time between the two surveys should be treated as more indicative of direction rather than as precise estimates.50 II. POVERTY PROFILE 4.3 Where are the poor? Rural areas account for 60 percent of the households in the country and 65 percent of the population, but only account for 38 percent total income (2003/04 NHIES). About 52 percent of the households and 60 percent of the population lives in the predominantly rural northern regions of Caprivi, Kavango, Ohangwena, Omusati, Oshana and Oshikoto. The Khomas region, which houses the capital city, and the Erongo regions are predominantly urban. Karas and Otjozondjupa regions also have a considerable level of urbanization. 4.4 Regions that are predominantly rural show a high percentage of poor and extremely poor households, suggesting a rural feature to poverty. The Kunene and Omaheke regions have a particularly higher than normal share of households that are severely poor. They are the only regions with two digit percentages of households classified as severely poor. Almost half of 49 This definition follows the official definition used by the government and allows hence for comparison with the official report. However, the author as well as the Central Bureau of Statistics is well aware of the shortcomings of the food consumption ratio as a poverty indicator since it often tends to underestimate urban poverty. The Central Bureau of Statistics is therefore working on a poverty line as a more robust indicator. 50 For more details on the comparison between the two surveys, see 2003/04 Namibia Household Income and Expenditure Survey, Main Report, November 2006. 62 the households in the Kavango region are food poor followed by Omusati and Oshikoto region, making the top three regions with the highest percentage of poor households (Table 4.1). In general a majority of the poor households are situated in rural areas. Comparison with the 1993/4 NHIES data shows an overall decrease in percent of poor and severely poor households. All the regions but Oshana show a decline in the share of households that are severely poor between 1993/4 and 2003/4. Similarly, with only the exception of Omusati and Oshikoto, all the regions show a reduction in the share of poor households. Although there is a reduction, the differences between urban and rural remain large and a noteworthy number of rural households remain food poor. Table 4.1: Percentage of Poor and Severely Poor Households by Region Share of Households in Poor Households (incl. Severely Poor 2003/04 severely poor) Households Urban Rural 2003/04 1993/4 2003/04 1193/94 Caprivi 27.6 72.4 43.6 46.1 7.1 5.8 Erongo 83.8 16.2 5.7 26 0.4 6.7 Hardap 39.5 60.5 27.5 29 4.9 4.7 Karas 53.8 46.2 18.5 30 3.1 3.7 Kavango 20.1 79.9 50.4 69.4 8 18.6 Khomas 92.5 7.5 3.6 8.5 0.6 1.1 Kunene 32.6 67.4 37 40.6 11.2 11.3 Ohangwena 2 98 22.7 41.5 0.2 9.4 Omaheke 24.3 75.7 40.4 52.8 12.4 23.6 Omusati 1.8 98.2 46.7 39.6 1.8 8.3 Oshana 41.2 58.8 31.3 40.6 6 4.7 Oshikoto 13 87 47 37.8 6.1 8.6 Otjozondjupa 50.7 49.3 18.7 40.7 3.4 10.8 Namibia 40.5 59.5 27.8 37.1 3.9 8.2 Source: NHIES Data and NHIES 1993/4 Survey Repor Demographic Factors 4.5 Age structure and dependency ratio. It is generally accepted that children and the old tend to be more vulnerable than those in the middle age group as they lack assets to generate income. Given Namibia’s colonial history a great number of the elderly had never been part of formal employment where they could have catered for old age through pension contributions or did not earn enough to allow them to make lifetime savings. A large number of the current generation of elderly relies on the old-age state support, which is N$370 per month or N$4,440 per annum. While only about 18 percent of households are headed by the elderly in Namibia, a disproportionately large number of such households are poor (43 percent). Further, a majority of these poor elderly headed households are in the rural areas. Omusati, Oshikoto, Ohangwena, Kavango and Oshana regions show a high percentage of households headed by the elderly. All these regions are largely rural. The rural share of households headed by the elderly is also high compared to the share of urban households headed by the elderly. Migration to urban areas may further be causing vulnerability as the elderly and children are left behind in the rural areas. 63 Table 4.2: Poverty Groups and Age Structure by Region Under 21 21-64 65+ non poor poor non poor poor non poor poor Caprivi 2.2 1.0 48.7 35.9 5.6 6.7 Erongo 0.7 0.1 86.4 5.0 7.2 0.7 Hardap 0.3 0.4 59.3 23.4 12.9 3.7 Karas 1.1 0.5 71.6 15.6 8.7 2.4 Kavango 1.0 0.8 42.9 38.6 5.7 11.1 Khomas 0.9 0.0 91.8 3.5 3.7 0.1 Kunene 1.3 0.3 57.0 27.8 4.8 8.9 Ohangwena 3.1 0.0 48.4 11.2 25.9 11.5 Omaheke 1.1 1.8 52.0 35.1 6.5 3.5 Omusati 1.0 0.7 36.2 26.1 16.1 19.8 Oshana 0.5 0.5 56.5 19.8 11.7 11.0 Oshikoto 1.0 1.1 41.1 31.1 10.9 14.8 Otjozondjupa 1.0 0.0 73.7 17.3 6.7 1.4 Namibia 1.2 0.5 61.0 19.7 10.1 7.7 Urban 1.0 0.1 87.7 6.4 4.6 0.2 Rural 1.3 0.7 42.7 28.7 13.8 12.7 Source: NHIES Data 4.6 Gender of the household head. Women in general are regarded as a vulnerable group. This is confirmed by the data from the 2003/04 NHIES. Overall distribution of poor households between the male and female headed households shows that more male-headed households are poor compared to female headed households. However, there are more male headed households in Namibia compared to female headed households.51 An examination of the female and male headed households that are poor as a share of total female and male headed households respectively reveals that female headed households are relatively worse-off in terms of food poverty. The trend is similar for rural and urban areas. Table 4.3 shows the share of poor households by sex per region. It reveals that rural regions have a high share of female-headed households. This may suggest that women headed households are more vulnerable to poverty. The share of female-headed household in rural areas has increased from 34 percent in 1993/94 to 37 percent in 2004. The share of male-headed households in rural areas in turn has decreased from 66 percent to 63 percent. This probably indicates an increase in single parent families, since in Namibia men are traditionally the heads of the households. Such a situation has poverty implication, given the historical situation of women in terms of their education and participation in economic activities (discussed below). 4.7 Analysis of the Labor Force Survey finds evidence for a substantial “raw� earnings differential between men and women. Before controlling for differences in the characteristics of men and women, it appears that men on average earn 34 percent more then women. Only two- fifths of this differential is explained by differences in the average characteristics of men and women, and the remaining three-fifths is explained by differences in the level of remuneration 51 The survey does not distinguish between de-jure and de-facto head of household and hence both household types are aggregated into one category. This limits the gender analysis since it can be assumed that de-facto female-headed households are often better off than de-jure female-headed households because the latter ones usually benefit to a much lesser degree from migrant workers’ transfers. 64 between men and women for given characteristics (conventionally interpreted as a discrimination effect). Table 4.3: Poverty Incidence by Gender Total % of Poor Total % of Poor male- female-headed headed households households Caprivi 45.0% 42.2% Erongo 5.5% 5.8% Hardap 17.9% 31.6% Karas 19.0% 18.3% Kavango 48.5% 51.4% Khomas 3.8% 3.5% Kunene 36.2% 37.5% Ohangwena 22.5% 22.9% Omaheke 27.3% 45.5% Omusati 51.1% 43.2% Oshana 35.8% 26.8% Oshikoto 54.4% 41.3% Otjozondjupa 10.0% 23.0% Namibia 30.0% 26.3% Urban 7.7% 6.1% Rural 43.6% 41.5% Source: NHIES 2003/04 Data 4.8 Largely rural regions have more female-headed households. Figure 4.1 shows regional composition of household heads among the poor households. Oshana, Oshikoto, Omusati, Ohangwena and Caprivi have more than 50 percent of the poor households headed by women. Figure 0.1: Share of Poor Households by Sex and Region Female Male 100% 90% 42.3 44.2 45.4 80% 47.6 48.5 55.0 56.1 64.0 70% 67.6 68.8 70.3 80.2 81.4 82.5 60% 50% 40% 57.7 55.8 54.6 30% 52.4 51.5 45.0 43.9 36.0 20% 32.4 31.2 29.7 19.8 18.6 17.5 10% 0% o i p pa o e a ne go as riv a i as ia at ng an da ek ot en ib ju ar on us ne ap om ik va ah ar sh am w nd K sh Er m Ku C ng H Kh Ka O m zo O N O O ha tjo O O Source: NHIES Data 65 4.9 Education of the head of household. The national average of the household heads with no formal education is 23.4 percent. There are wide regional variations in terms of the education of the head of household. Some regions such as Kunene have a high percentage of households headed by persons with no formal education at all (about 38 percent of household heads in Kunene have no formal education). Ohangwena, Omaheke, Oshikoto and Otjozondjupa are the other regions with a sizeable percentage of household heads with no formal education. Table 4.6 shows the share of female and male headed households by the level of education attainment. At the national level, a slightly higher share of female headed households has no formal education than male headed households. Compared to the male headed households, a higher proportion of female headed households have secondary education. The other levels of education show male household heads dominating in most of the regions. On average 9 percent of the household heads have obtained a tertiary education level, while 36 percent have obtained at least secondary education. Variably, Ohangwena is showing the second best percentage of household heads with tertiary education at 10.6 percent. The Ohangwena region has also shown a sharp reduction in the poor and very poor households (Table 4.4). As expected, Khomas has the highest percentage of household heads with tertiary qualifications at 19.2 percent. The Khomas region houses the capital city of the country and is the economic nucleus of the country and hence a high level of education. 66 Table 4.4: Level of Education of Household Head by Sex and Region No formal education Primary Education Secondary Education Tertiary Education Female Female Female Female Total Total Total Total Male Male Male Male Caprivi 28.94 13.45 16.77 26.10 45.51 48.39 12.05 21.3% 21.4% 46.9% 10.4% % % % % % % 8.78% % Erongo 11.92 31.85 35.44 55.65 44.34 10.0% 34.2% 48.1% 7.8% 5.95% % % % % % 6.55% 8.30% Hardap 20.86 22.35 37.09 34.96 41.39 36.82 21.9% 35.6% 38.2% 4.3% % % % % % % 0.66% 5.87% Karas 14.57 10.01 32.45 34.19 47.68 44.64 11.16 11.4% 33.7% 45.6% 9.4% % % % % % % 5.30% % Kavango 36.94 22.60 33.33 37.57 22.52 30.09 27.3% 36.2% 27.6% 8.9% % % % % % % 7.21% 9.73% Khomas 10.09 12.02 18.93 26.39 52.37 42.08 18.61 19.50 11.4% 24.1% 45.3% 19.2% % % % % % % % % Kunene 35.97 40.04 31.91 27.26 29.76 28.01 38.1% 29.5% 28.8% 3.6% % % % % % % 2.36% 4.70% Ohangwena 34.17 28.87 31.6% 28.02 32.85 30.3% 27.45 27.62 27.5% 10.36 10.67 10.6% % % % % % % % % Omaheke 25.63 37.13 28.16 24.27 37.34 32.89 33.5% 25.6% 34.3% 6.7% % % % % % % 8.86% 5.70% Omusati 24.34 23.44 35.96 43.44 30.71 24.09 23.9% 39.4% 27.6% 9.0% % % % % % % 8.99% 9.03% Oshana 25.54 21.38 33.01 34.62 35.95 33.81 10.18 23.5% 33.8% 34.9% 7.8% % % % % % % 5.50% % Oshikoto 21.45 34.31 32.56 33.66 37.73 26.14 29.3% 33.3% 30.5% 6.9% % % % % % % 8.27% 5.88% Otjozondjupa 20.63 32.99 30.16 27.30 40.95 33.43 29.1% 28.2% 35.8% 6.9% % % % % % % 8.25% 6.28% Namibia 24.00 22.87 23.4% 29.75 32.22 31.2% 38.00 35.06 36.2% 9.2% % % % % % % 8.25% 9.85% Source: NHIES Data 4.10 A strong positive relationship between school attendance and earnings is discerned from the Labor Force Surveys. A male worker who attended school, earns 67 percent more than a male worker who does not attend school, other things equal. For female workers, the school attendance premium is lower at 38 percent. 4.11 The share of poor households shrinks as the education level52 increases (Table 4.5). Overall 47.3 percent of households headed by persons with no formal education are poor, 34.3 percent of households are headed by person with primary education. The share of poor households decreases further when the head of household have low secondary and senior 52 Education levels are classified as follows: primary education (Grades 1-7), low secondary (grades 8-10), high secondary (Grades 11-12 and 13). 67 secondary, 20 percent and 9.2 percent respectively. Only 0.7 percent of household headed by persons with tertiary education are classified as poor. The differences in the share of poor and non-poor households are particularly high in regions that are predominantly urban such as Erongo and Khomas. The differences become consistent only at the higher levels education (tertiary and postgraduate). Table 4.5: Share of Poor and Non Poor Households by Level of Education Low No formal Primary Secondary Senior Tertiary education education education secondary education Post graduate Non Non Non Non Non Non poor poor poor poor poor poor poor Poor poor poor poor Poor Caprivi 35.1 64.9 50.2 49.8 58.6 41.4 68.5 31.5 97.6 2.4 100.0 0.0 Erongo 89.6 10.4 93.1 6.9 95.0 5.0 93.8 6.2 100.0 0.0 100.0 0.0 Hardap 51.8 48.2 65.5 34.5 85.2 14.8 97.7 2.3 100.0 0.0 0.0 0.0 Karas 61.6 38.4 74.9 25.1 84.4 15.6 94.2 5.8 100.0 0.0 0.0 0.0 Kavango 35.4 64.6 41.7 58.3 55.8 44.2 84.1 15.9 100.0 0.0 100.0 0.0 Khomas 89.2 10.8 92.1 7.9 97.0 3.0 98.8 1.2 99.5 0.5 100.0 0.0 Kunene 43.4 56.6 71.9 28.1 82.1 17.9 86.2 13.8 100.0 0.0 0.0 0.0 Ohangwena 69.9 30.1 79.4 20.6 83.9 16.1 91.3 8.7 100.0 0.0 0.0 100.0 Omaheke 40.2 59.8 56.1 43.9 76.2 23.8 92.7 7.3 100.0 0.0 0.0 0.0 Omusati 43.2 56.8 48.0 52.0 63.2 36.8 70.3 29.7 96.8 3.2 100.0 0.0 Oshana 46.8 53.2 64.0 36.0 71.3 28.7 93.0 7.0 100.0 0.0 0.0 0.0 Oshikoto 39.0 61.0 46.2 53.8 58.8 41.2 73.2 26.8 97.6 2.4 100.0 0.0 Otjozondjupa 66.1 33.9 77.2 22.8 89.4 10.6 97.1 2.9 97.8 2.2 100.0 0.0 Namibia 52.7 47.3 65.7 34.3 80.0 20.0 90.8 9.2 99.3 0.7 99.4 0.6 Source: NHIES Data 4.12 The majority of household heads with no formal education live in the rural areas (Table 4.6). Persons with no formal education head few households in urban centers compared to rural areas with an average of 18.8 percent. Since education levels are believed to be strongly associated with incomes, the data confirms special vulnerability for rural households. Regions with significant urban constituencies exhibit a generally low percent of poor households compared to regions that are largely rural. While the structure of the Household Survey data does not allow for analysis of the education level with the poverty status, evidence from the Labor Force survey shows higher incomes associated with school education. 4.13 There is a very pronounced regional pattern to earnings levels both for men and for women. Men earn less in all regions compared to the metropolitan area of Khomas. The only exception is the coastal region of Erongo. In some cases the earnings penalty for working away from capital is very considerable. For women all regions pay less than the capital, and again the earnings disadvantage can be very high indeed, particularly in the north and east of the country. 68 Table 4.6: Level of Education of Household Head by Rural / Urban and Region No formal education Primary Education Secondary Education Tertiary Education Urban Rural Total Urban Rural Total Urban Rural Total Urban Rural Total Caprivi 1.4% 19.9% 21.3% 4.3% 17.1% 21.4% 24.0% 22.9% 46.9% 8.5% 1.9% 10.4% Erongo 3.1% 6.8% 10.0% 22.2% 12.0% 34.2% 37.3% 10.7% 48.1% 4.8% 3.0% 7.8% Hardap 6.2% 15.8% 21.9% 11.4% 24.3% 35.6% 20.3% 17.8% 38.2% 1.1% 3.2% 4.3% Karas 4.1% 7.3% 11.4% 15.9% 17.8% 33.7% 28.4% 17.2% 45.6% 5.3% 4.1% 9.4% Kavango 5.4% 22.0% 27.3% 11.0% 25.2% 36.2% 15.1% 12.5% 27.6% 5.8% 3.1% 8.9% Khomas 5.4% 5.9% 11.4% 17.2% 6.9% 24.1% 40.0% 5.3% 45.3% 17.3% 1.9% 19.2% 12.4 Kunene 25.7% 38.1% 17.3% 12.2% 29.5% 19.4% 9.5% 28.8% 1.7% 1.9% 3.6% % Ohangwena 2.2% 29.3% 31.6% 6.7% 23.6% 30.3% 14.2% 13.4% 27.5% 8.1% 2.5% 10.6% 10.3 Omaheke 23.1% 33.5% 13.4% 12.2% 25.6% 22.9% 11.4% 34.3% 4.3% 2.4% 6.7% % Omusati 1.2% 22.8% 23.9% 4.4% 35.0% 39.4% 12.1% 15.6% 27.6% 5.5% 3.5% 9.0% Oshana 2.9% 20.6% 23.5% 9.1% 24.7% 33.8% 19.8% 15.1% 34.9% 5.6% 2.2% 7.8% Oshikoto 2.8% 26.5% 29.3% 7.8% 25.5% 33.3% 11.7% 18.8% 30.5% 2.5% 4.3% 6.9% Otjozondjupa 7.5% 21.6% 29.1% 11.1% 17.1% 28.2% 24.3% 11.5% 35.8% 3.7% 3.2% 6.9% Namibia 4.5% 18.8% 23.4% 11.2% 20.1% 31.2% 22.2% 14.0% 36.2% 6.3% 2.9% 9.2% Source: NHIES Data Asset Ownership and Poverty Status 4.14 Three forms of wealth are used to describe the poverty profile: namely land, livestock and ownership of simple consumer durables. Assets signify security and standing, a sign that the owner is well to do at least by the benchmark of his commune and that wealth is, in addition, a foundation for further wealth. 4.15 Land Ownership. On average the data suggests that the poor households own more land than the non-poor. 85 percent of the poor households have indicated that they owned land, while it is only 57.1 percent for the non-poor households. 88 percent of the rural poor households indicated owning land and 68 percent in urban areas have indicated as well. Land ownership share by poor household is particularly high in predominantly rural regions such as Kavango, Caprivi, Omusati, Ohangwena, Oshana and Oshikoto. 90 percent or more of the poor household in these regions claim to own land. This probably captures the communal land system in the rural areas where the majority of the poor resides. The land is used mainly for subsistence activities. The data does not capture the size of the land holding, which could give a better idea of the value of the land owned by the poor households. 69 Table 4.7: Land Tenure Type for Poor Households Owned Owned but not Occupied free Rented w/o paid off subsidy Caprivi 92.3 0.7 5.8 1.2 Erongo 36.5 3.3 18.8 41.3 Hardap 51.1 0.7 43.5 4.7 Karas 44.3 2.6 44.9 8.2 Kavango 99.7 0.1 0.1 0.0 Khomas 61.4 10.8 22.1 5.6 Kunene 81.3 0.0 16.0 2.7 Ohangwena 93.8 0.0 6.2 0.0 Omaheke 60.6 0.8 37.3 1.3 Omusati 98.7 0.0 1.2 0.1 Oshana 97.2 0.0 1.2 1.7 Oshikoto 90.2 0.2 9.0 0.6 Otjozondjupa 37.8 1.2 53.9 7.0 Namibia 85.2 0.6 12.1 2.1 Source: NHIES Data 4.16 However, only 39 percent of the poor households own fields for crop production and only 2 percent own grazing land. 35 and 69 percent of the poor households have access to fields for crops and grazing respectively, but do not own the land. This is again can be indicative of the communal nature of land holdings, which indicates potential vulnerability of poor households, as they have no control over the land. This results in the deterioration and degradation of the land. However, this generalization needs to be made with caution as the differences may be a result of agro-ecological zone, quality of land and the resources needed to utilize the land. Table 4.8: Access to Field for Crops and Grazing Land by the Poor Households Owns Does not own, but Neither owns nor Not stated has access has access Field Grazing Field Grazing Field Grazing Field for Grazing for Land for Land for Land Crops Land Crops Crops Crops Caprivi 78.3 1.3 4.5 64.8 16.3 33.2 1.0 0.8 Erongo 3.4 3.4 13.3 30.9 83.3 65.7 0.0 0.0 Hardap 2.7 2.9 15.2 35.6 75.6 59.5 6.5 2.0 Karas 0.9 1.6 26.1 46.9 73.0 51.5 0.0 0.0 Kavango 63.9 5.3 17.4 68.0 18.7 26.5 0.0 0.3 Khomas 15.5 10.3 29.3 39.7 55.2 49.9 0.0 0.0 Kunene 52.7 1.7 12.5 81.9 34.8 16.4 0.0 0.0 Ohangwena 14.5 4.8 85.3 90.0 0.2 5.1 0.0 0.0 Omaheke 6.4 6.3 11.3 48.7 81.6 44.2 0.7 0.7 Omusati 4.6 0.3 90.3 87.4 5.0 12.3 0.0 0.0 Oshana 40.1 5.3 42.6 62.3 17.1 32.1 0.3 0.3 Oshikoto 88.2 0.3 4.7 81.6 7.2 18.1 0.0 0.0 Otjozondjupa 15.3 0.6 14.8 27.9 69.2 70.9 0.6 0.6 Namibia 39.1 2.8 35.2 68.8 25.2 28.1 0.5 0.3 Source: NHIES Data 70 Livestock ownership. Livestock or domesticated animals by poverty groups are kept as a form of wealth, food and rarely for commercial purposes. Table 4.9 shows the share of livestock owned by the non-poor and the poor groups, and the share of non-poor and poor households that actually own livestock. The table shows that of the households owning livestock the majority are non- poor household in all the identified livestock. The tilt in favor of non-poor household probably explains the accessibility to facilities needed in keeping livestock, such as grazing land. The poor are only comparing slightly favorably in terms of keeping pigs, donkeys / mules and poultry, although the non-poor households still maintain a higher share for these livestock. Table 4.9: Livestock Ownership by Poverty Group (percent) Livestock ownership Share owning by poverty group livestock per poverty group Non-poor poor Non-poor Poor Owns cattle 69.1 30.9 32.3 37.5 Owns sheep 78.7 21.3 7.0 4.9 Owns pig 55.0 45.0 10.9 23.2 Owns goat 66.9 33.1 36.1 46.5 Owns donkey/mule 59.0 41.0 14.2 25.5 Own Poultry 61.4 38.6 41.3 67.6 Source: NHIES Data 4.17 However, only 37.5 percent of the poor households actually own cattle. The poor households that own goats are 46.5 percent and 67.6 percent own poultry. Poultry and goats are relatively easy to keep hence a high share of poor household owning them. The share of poor household owning donkeys is also higher compared to the share of non-poor households that own donkeys. The poor will probably rely more on donkey and mules for cultivating their fields, which may not be necessary for non-poor households who can afford other modern technologies of cultivating their lands such as tractors and hence no need to own donkey or mules. Again this interpretation must be made with caution as the agro-ecological zone may influence it. For instance, Ohangwena, Omusati, Oshikoto and Oshana exploit both agronomic and livestock activities and hence may find donkey useful. In return Kunene and Otjozondjupa and Omaheke, are livestock farming oriented and may have no use for donkeys. 4.18 Durable household items. Durable household items, like radio, television, bicycles, telephone, stoves and refrigeration are not owned by a majority of the population – both poor and non-poor as shown in Table 4.10. Radio was the only exception among the selected durables that the majority of the poor appear to posses. The other durables seem to be a luxury for the majority of the poor as well as for a significant number of non-poor households. For instance 49.3 percent of the non-poor household do not own a television set. Although, this together with the stoves must be interpreted with care as it may be a as result of lack of television reception and lack of electricity in some of the areas. 71 Table 4.10: Proportion of Households Not Owning the Stated Durables non poor poor Own bicycle 75.4 80.9 Own a radio 14.1 18.3 Owns a television set 49.3 88.6 Own telephone / cell phone 25.1 88.6 Own stove (gas or electric) 41.7 89.1 Refrigeration 52.2 91.5 Source: NHIES Data Major Economic Activities by Poverty Groups 4.19 At the aggregate level, the main source of income for most household is salaries and wages, with 46.9 percent of the households having salaries and wages as the main source of income (Table 4.11). It is followed by subsistence farming at 29.1 percent, while 9.3 percent of the households have old age pension as their main source of income. However, 51.2 percent of the poor households have subsistence farming as the main source of income, followed by salaries and wages at 20.4 percent followed by old age pension at 12.3 percent. The salary / wage earners among the poor reside mainly in urban areas. Poor households in urban areas have non-farming business activities as the second main source of income. Table 4.11: Main Source of Income by Poverty Group Non poor Poor Total Urban Rural Total Urban Rural Total Salary/Wages 79.4 32.7 57.0 56.7 16.5 20.4 46.9 Subsistence Farming 0.6 42.5 20.7 0.5 56.6 51.2 29.1 Commercial Farming 0.0 1.9 0.9 0.0 0.1 0.0 0.7 Non-Farming Business Activities 9.2 4.6 7.0 22.8 4.3 6.1 6.7 Pensions 5.0 11.5 8.1 4.6 13.2 12.3 9.3 Other 5.8 6.9 6.3 15.3 9.3 9.9 7.3 Source: NHIES Data 4.20 The non-poor households, in contrast, have salary/wages as the main source of household income, followed by subsistence farming at 20.7 percent. The latter is mainly as a result of subsistence activities in the rural areas. Salary / wages and subsistence farming form the two main sources of income for many households in Namibia. 4.21 A comparison over the two household survey periods shows that over 45 per cent of the households had salary and wages as the main source of income (Table 4.12). However, rural areas rely less on salary and wages as a main source of income compared to urban areas. For the two periods, half of the rural households have subsistence farming as the main source of income. A noteworthy number of households in the rural areas also rely on old age pension as the main source of income. Rural areas show an increase in reliance on non-farming business activities, which almost doubled from 2.5 percent to 4.5 percent. Similarly, rural households have more than doubled their reliance on other activities. This seems to have resulted in the decreased reliance on salaries and wages, subsistence farming and on old-age pension in rural areas. Although such decreases are modest, they are important as evident in the decrease in the percent 72 of poor households and in inequality (Gini-coefficient). It may also be indicative of the increasing economic activities in these regions. Table 4.12: Main Source of Income by Region for 1993/4 and 2003/4 (per cent) Salary/Wages Subsistence Commercial Non- Pensions Other Farming Farming Farming Business Activities 1993/94 2003/04 1993/94 2003/04 93/94 03/04 93/94 03/04 93/94 03/04 93/94 03/04 Caprivi 34.9 32.9 44.4 17.8 0.0 0 4.3 17. 10.8 13. 5.6 19. 1 0 2 Erongo 73.6 75.7 3.2 2.2 0.3 0 2.2 8.2 11.6 7.7 9.2 6.2 Hardap 67.7 62.5 1.8 4.4 3.2 3.0 3.2 2.5 16.8 19. 7.3 8.0 6 Karas 66.5 74.2 2.6 4.5 4.8 2.3 2.2 3.6 18.5 10. 5.3 5.0 5 Kavango 49.3 28.5 20.1 34.4 6.6 0 4.8 12. 14.0 11. 5.2 12. 9 4 7 Khomas 83.3 81.5 0.3 0.2 0.2 0.5 8.6 9.7 4.7 3.8 2.9 4.5 Kunene 6.5 44.7 71.8 19.1 0.0 3.4 2.4 5.3 14.1 16. 5.3 11. 3 2 Ohangwena 26.8 15.5 60.3 58.3 0.0 0 4.8 3.5 5.8 19. 2.3 3.2 6 Omaheke 52.1 52.0 19.2 19.8 2.8 2.1 4.2 4.5 18.3 6.2 3.3 15. 5 Omusati 8.9 13.2 78.2 80.8 0.2 0 2.2 1.9 9.8 3.3 0.7 0.8 Oshana 28.4 31.6 48.7 49.6 0.0 0 10.0 9.0 9.5 3.8 3.3 6.0 Oshikoto 28.1 25.7 49.0 49.9 0.6 0.2 2.9 2.7 15.4 12. 4.1 9.2 2 Otjozondjupa 74.9 73.7 3.8 3.2 2.7 1.9 4.1 3.9 9.7 7.1 4.9 10. 1 Urban 76.5 77.9 2.2 0.6 0.1 0 8.0 10. 7.3 5.0 5.9 6.5 1 Rural 26.3 25.9 52.3 48.4 1.9 1.1 2.5 4.5 13.8 12. 3.3 7.9 2 Namibia 46.2 46.9 35.2 29.1 1.6 0.7 4.3 6.7 11.5 9.3 4.6 7.3 Source: NHIES Data 4.22 Some regions show an increasing reliance on old age pension as a main source of household income. While overall there is a slight decline in the number of households relying on pension, a few regions, namely Caprivi, Hardap, Kavango, Ohangwena and Kunene have actually observed an increase in this reliance. Hardap and Ohangwena, in particular, show a high reliance on old age pension compared to other regions, which is estimated at just less than 20 per cent in 2003/04. Hardap is for the most part remote, barren and arid, which limits economic activity opportunities. The increase may represent an improvement in the coverage and inclusion of the elderly, who may have been excluded from the old age pension in the past. 4.23 Commercial farming and non-farming activities continue to be a negligible source of income. Overall, commercial farming has declined from being a main source of income for 1.6 percent of households in 1993/4 to only 0.7 per cent of households in 2003/4. Whilst the increase 73 in the other activities may have contributed to the regression of commercial farming activities as main source of income, erratic climatic conditions in Namibia probably also contribute to the decline. However, it is also likely that there is a greater preference for formal employment than to engage in farming or self-employment. In addition, farming is to some extent undertaken on a part time and recreation basis, which mitigates the income and profit aspect from farming activities. 4.24 The decline might also be a sign of a lack of progress of the land re-distribution policy. This may suggest that redistribution is not taking place fast enough or that previously productive land may have turned unproductive. The extremely hostile environmental conditions of Namibia require that resettled persons have farming skills, which often is lacking. It is therefore of paramount importance that the land redistribution policy include a training and capacity building element for the resettled persons. 4.25 The majority of poor households rely on subsistence farming except for regions that are principally urban. Table 4.13 shows the sources of income for the poor households. Old age pension as the main source of income is slightly higher in poor household, although, Omusati and Oshana show a relatively low reliance on pension. This is probably due to the high degree of subsistence activities. For instance 92 percent of poor households in Omusati have subsistence farming as the main source of income. Similarly, in terms of poverty targeting, old age pension provides an avenue of targeting poverty, especially in rural areas where there are have a substantial number of household headed by old people. Overall 37 percent of households that has old age pension as main source of income are poor. This average increases to 47 percent if the regions that are predominantly urban (Erongo, Hardap, Karas and Khomas) are excluded. Table 4.13: Main Source of Income of Poor Households Salary/Wages Subsistence Commercial Non- Pensions Other Farming Farming Farming Business Activities Caprivi 16.8 24.6 0.0 17.6 16.4 24.6 Erongo 68.5 4.2 0.0 11.3 11.2 4.7 Hardap 61.6 4.8 0.0 3.5 19.9 10.2 Karas 67.4 10.3 0.0 3.3 10.9 8.2 Kavango 12.4 47.5 0.0 13.3 13.5 13.2 Khomas 60.6 0.0 0.5 24.2 3.8 10.9 Kunene 20.9 35.8 0.6 4.2 26.0 12.5 Ohangwena 4.0 64.2 0.0 2.9 26.2 2.8 Omaheke 51.5 17.6 0.0 1.8 7.3 21.8 Omusati 2.8 92.2 0.0 0.7 3.5 0.9 Oshana 6.7 74.5 0.0 6.2 4.6 8.0 Oshikoto 7.9 65.0 0.1 1.9 15.2 9.9 Otjozondjupa 74.0 3.7 0.0 2.9 8.6 10.9 Namibia 20.4 51.2 0.0 6.1 12.3 9.9 Source: NHIES Data 4.26 The raw earnings differential between formal and informal sector workers is also very large in Namibia (informality is defined as working in an establishment with 5 or fewer employees). Clearly, there is a huge financial advantage to enjoying stable employment with a 74 large scale employer. The majority of the earnings disadvantage for informal workers can be explained by their characteristics, but it is clear that informal workers are disadvantaged because the regions and industries in which informal employment is found are low-paying ones. Structure of Household Basic Consumption Expenditures 4.27 Given the definition of the poor, the mean share is highest for food and beverages for the poor households (Table 4.14). The mean share of expenditure on food and beverages is 70.6 percent for the poor households. The mean share for the other items compares poorly with that of non-poor households. On average the poor households spend 0.9 percent of their consumption expenditure on education and health a piece and 4 percent on clothing and footwear. The structure of the basic food expenditure is same for urban and rural areas, although the mean share for all the selected consumption items is slightly higher for the urban areas. Rural household, whether poor or not, on average spend more on food than the households in urban areas. Clothing and footwear is second most important in all the consumption groups, although the non- poor have a higher share of this item compared to the poor. Rural areas have a slightly smaller mean share for clothing and footwear. The mean share for communication expenditure constitutes a very small share of all the households particularly in rural areas where it is less than one percent. Table 4.14: Percentage Mean Share of Basic Goods Expenditure Urban Rural Namibia Non poor Poor Non poor Poor Non poor Poor Food and beverages 27.3 68.7 38.6 70.9 32.4 70.6 Education 2.7 1.1 2.0 0.8 2.4 0.9 Health 5.0 1.1 2.7 0.8 4.0 0.9 Communication 2.7 0.9 1.4 0.3 2.1 0.4 Transport 8.7 1.6 6.2 1.3 7.6 1.3 Clothing & footwear 9.0 4.7 6.9 3.9 8.1 4.0 Source: NHIES Data III. INEQUALITY 4.28 The Gini coefficient for Namibia is estimated at 0.604 according to results from the 2003/04 survey. The coefficient is calculated on adjusted per capita income53 for every single household member. The Gini coefficient in the 1993/94 survey was estimated at 0.7, reflecting an improvement in the distribution of income. However, as noted above the absolute magnitude of the change should be treated with caution. Nevertheless, the level of inequality remains high by international standards as shown in Figure 4.2. 53 For definition of adjusted per capita income see the 2003/04 NHIES Main Report, November 2006. 75 Figure 0.2: Gini Coefficients – Namibia and Resource-Rich Countries Gini Coefficients - Namibia and Resource-Rich Countries South Africa Angola Namibia Mexico Nigeria Malaysia Venezuela Cameroon Iran, Islam. Rep. Turkmenistan Trinidad and Tobago Azerbaijan Algeria Egypt Indonesia Kazakhstan Russian Federation Ukraine Norway 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 Source: 2005 World Development Indicators and NHIES-2003/04 4.29 Some of the possible explanations for this observed reduction in the gini-coefficient are as follows: (i) inclusion of previously disadvantaged in economic activities; (ii) an expansion of the safety net coverage as reflected in public schemes like the old age pension and grants for the orphan and vulnerable children; (iii) an increase of the income tax threshold which increases the disposable income, particularly of the low income group; (iv) a significant increase in the production and consumption of Mahangu (a main food item in Namibia) at the time of the 2003/04 NEIES as compared to 1993/94 which was a drought year; and (v) an increase in the internal transfer of money from the urban to the rural sectors. 4.30 Distribution of expenditure by quintiles shows that the top 20 percent of the population accounts for 63 percent of the total consumption expenditure. The lowest quintile accounts for only 3 percent. The highest quintile spends 21 times more than the lowest quintile. This demonstrates the broad picture of inequality in Namibia, which cannot necessarily be generalized to rural areas. Figure 0.3: Distribution of Household Consumption Expenditure by Quintiles 63 70 60 50 40 30 17 20 10 3 6 10 0 1st quint 2nd quint 3rd quint 4th quint 5th quint Source: NHIES Data 76 4.31 Mean consumption expenditures vary considerably across regions (Figure 4.4). The Khomas region leads with the highest expenditure levels. The Khomas region hosts the capital city of Namibia and is the economic heart of the country. The regions that are notably urban are all above the national average. The level of household consumption expenditure reflects the level of poverty, showing the capability of the household’s command over basic necessities. Nevertheless, at the broad-spectrum, there are other characteristics that could be correlated with expenditure capability, including attributes such as literacy, possession of household durables, state of housing etc. Figure 0.4: Mean Consumption Expenditures in N$ by Region Khom as 29245 Erongo 19642 Hardap 15558 Karas 15334 Om aheke 13722 Nam ibia 13149 Otjozondjupa 12032 Os hana 11321 Kunene 8844 Caprivi 6701 Os hikoto 6482 Om us ati 6101 Ohangwena 5039 Kavango 5038 0 5000 10000 15000 20000 25000 30000 Source: NHIES Data IV. BENEFIT INCIDENCE ANALYSIS FOR HEALTH AND EDUCATION SECTORS 4.32 Access to Health Facilities. Overall the mean distance to a hospital or clinic is 17.6 kilometers for poor households and 10.1 kilometers for non-poor households (Table 4.15). The distances are almost identical between the two groups in terms of rural and urban classifications. The distances are not different between poor and non-poor in their respective locations. Distances to hospitals or clinics are particularly high for the rural areas in Omaheke, Otjozondjupa, Khomas, Kunene and Karas regions. Given the size of the country and low population density, it is not surprising to see that the distances are much more in the rural areas than the urban areas. In terms of service access, the difference is not so much between poor and non-poor as it is between rural and urban areas. Given that the poor are less likely to have access to transport; those residing in the rural areas are exposed to additional hardship in utilizing these health facilities. 77 Table 4.15: Mean Distance to Health Facility (km) Non poor Poor Urban Rural Mean Urban Rural Mean Caprivi 1.6 6.0 3.6 1.9 8.0 7.2 Erongo 1.3 22.7 7.7 1.5 12.5 9.1 Hardap 1.6 25.3 14.0 2.2 31.8 27.5 Karas 1.4 32.7 13.7 1.3 39.9 31.1 Kavango 1.9 7.3 4.4 2.2 7.5 6.6 Khomas 2.0 48.3 10.1 1.9 48.4 31.0 Kunene 1.1 47.5 18.2 1.5 46.2 36.2 Ohangwena 1.7 11.6 8.0 1.4 15.4 14.2 Omaheke 1.5 37.0 15.1 1.9 52.3 37.9 Omusati 1.1 9.0 6.3 1.5 7.7 7.2 Oshana 2.0 6.5 4.3 2.2 7.2 6.5 Oshikoto 1.4 20.8 13.7 1.3 21.5 20.4 Otjozondjupa 1.8 34.2 16.7 1.8 51.6 42.3 Namibia 1.6 20.5 10.1 1.8 20.4 17.6 Source: NHIES Data 4.33 Access to Education Facilities. Distances to primary schools are longer for poor households (Table 4.16). Overall, the distances to primary schools are 7.1 kilometers for non- poor households and 11.5 kilometers for poor households. Mean distances for rural households are longer regardless of whether the households are poor or non poor. The poverty dimension comes in terms of the means to get to schools. The fact that the majority of the poor households are situated in rural areas entails that poor household face an extra burden of getting to schools, which may tilt the balance in the opportunity cost of not going to school. The distances are highest for rural areas in the Khomas, Omaheke, Otjozondjupa, Karas and Hardap regions. Table 4.16: Mean Distance to Primary Schools non poor poor Urban Rural Mean Urban Rural Mean Caprivi 1.5 2.9 2.2 2.2 2.8 2.7 Erongo 1.2 20.2 6.8 1.3 11.6 8.4 Hardap 0.9 21.5 11.7 1.4 29.2 25.1 Karas 0.9 23.6 9.8 0.7 30.5 23.7 Kavango 1.5 3.8 2.6 1.6 4.0 3.6 Khomas 1.5 35.7 7.5 1.8 47.0 30.1 Kunene 0.9 25.4 9.9 1.3 25.3 20.0 Ohangwena 1.8 4.0 3.2 1.6 3.3 3.2 Omaheke 1.1 29.3 11.9 1.1 42.9 30.9 Omusati 3.2 3.4 3.3 2.6 3.0 3.0 Oshana 1.5 2.4 2.0 2.3 2.6 2.6 Oshikoto 1.1 14.3 9.5 0.8 13.0 12.3 Otjozondjupa 1.2 29.7 14.3 1.4 34.6 28.4 Namibia 1.4 14.1 7.1 1.6 13.2 11.5 Source: NHIES Data 78 4.34 Access to Drinking Water. Only 3.7 percent of poor households have access to piped- water in the dwelling, compared to 38 percent of non-poor households (Table 4.17). Only 17 percent of the non-poor households have taps on site and 22 percent source from public taps. This is mainly due to the rural set up in the country, all households source water from a common source. Main source of water for most poor households is public taps at 34.4 percent. A noteworthy number of households still rely on unprotected well and flowing water. About 10 percent of the poor households rely on water from wells, of which 7 percent is unprotected well. Oshikoto, Omusati, Kunene, Ohangwena and Caprivi are the regions with a large share of poor households sourcing their water from unprotected sources. About 8 percent of poor households get their water from flowing sources, which are mainly rivers and the artificial canal that runs through Omusati and Oshana regions. It is likely that poor households are exposed to health risks as a large number them source water from sources that are potentially exposed to health hazards. 79 Table 4.17: Main Source of Water for Poor Households (percent) Otjozondjupa Ohangwena Omaheke Oshikoto Namibia Kavango Omusati Khomas Kunene Oshana Caprivi Erongo Hardap Karas Piped in dwelling 0.7 9.8 9.4 13.0 2.8 11.9 2.0 2.4 6.7 1.6 1.9 1.3 6.3 3.7 Dam/Pool/Stagnant 3.1 2.4 5.8 8.9 0.6 1.5 6.1 8.7 0.0 3.4 0.3 1.3 3.5 2.9 water Protected well 2.8 0.0 1.2 0.0 0.9 1.5 9.5 10.3 0.0 12.0 0.6 0.8 1.4 3.5 Unprotected well 6.9 0.0 0.0 0.0 4.4 0.0 9.5 7.9 0.0 15.6 4.0 16.9 0.0 7.3 Spring 0.0 0.0 0.0 0.8 0.0 0.0 4.8 0.8 0.0 0.0 0.0 0.0 0.0 0.3 Other 1.7 0.0 0.6 0.8 0.0 0.0 4.1 0.0 0.0 0.0 0.3 0.3 1.4 0.6 Piped on site 2.1 36.6 30.4 36.6 4.7 28.4 12.2 7.9 36.6 1.3 5.2 5.5 47.2 13.1 Neighbor’s tap 1.0 2.4 5.3 0.0 10.4 6.0 6.1 6.3 10.4 3.1 25.9 7.4 2.8 7.9 Public tap 23.9 14.6 24.6 24.4 13.9 40.3 12.2 31.0 25.6 55.7 59.9 41.7 26.4 34.4 Private Bore Hole 0.7 2.4 18.1 1.6 1.6 3.0 0.7 8.7 4.9 0.3 0.6 17.2 3.5 5.1 Rain Water Tank 0.3 0.0 0.6 1.6 0.3 0.0 0.0 1.6 0.0 0.0 0.3 0.0 0.0 0.3 Water carrier or 0.7 7.3 1.2 7.3 0.9 1.5 2.0 0.0 0.0 0.0 0.3 0.5 1.4 1.0 tanker Communal bore 40.8 24.4 1.2 2.4 20.3 6.0 25.9 14.3 15.9 1.0 0.0 7.1 6.3 12.1 hole Flowing water 15.2 0.0 1.8 2.4 38.9 0.0 4.8 0.0 0.0 6.0 0.6 0.0 0.0 7.7 Source: NHIES Data 4.35 Drinking water is easily accessible. The majority of the regions have a mean average distance of less than 1 kilometer to drinking water (Table 4.18). The Kavango region has the longest rural mean distance to drinking water at 2.3 kilometers, followed by Ohangwena region at 1.5 kilometers. Other regions with rural mean distances over one kilometer are Omusati, Oshana and Oshikoto. The maximum rural distance by a poor household in any region is 15 kilometer to drinking water. However access to water cannot necessarily be attributed to differences in poverty at the household levels. Location probably matters and Namibia, being a vast country, such distances are probably tolerable. Although where the distances are too long, it may affect the education of the children of the poor households, as it is generally the responsibility of children to fetch water. In addition, the provision of water is primarily only sufficient for basic consumption in the household and cannot really be exploited for income generating activities, which might enable households to change their poverty status. 80 Table 4.18: Mean Distance to Drinking Water Non poor Poor Urban Rural Mean Urban Rural Mean Caprivi 0.2 0.6 0.4 0.4 0.9 0.8 Erongo 0.0 0.5 0.2 0.1 0.4 0.3 Hardap 0.0 0.2 0.1 0.3 0.3 0.3 Karas 0.1 0.2 0.1 0.3 0.5 0.4 Kavango 0.1 1.6 0.8 0.3 2.3 2.0 Khomas 0.0 0.2 0.1 0.1 0.1 0.1 Kunene 0.0 0.7 0.3 0.2 1.1 0.9 Ohangwena 0.2 1.4 1.0 0.3 1.6 1.5 Omaheke 0.0 0.3 0.1 0.2 0.3 0.3 Omusati 0.1 1.1 0.8 0.3 1.4 1.3 Oshana 0.1 0.8 0.4 0.1 1.4 1.2 Oshikoto 0.0 0.8 0.5 0.1 1.2 1.2 Otjozondjupa 0.0 0.2 0.1 0.2 0.4 0.3 Namibia 0.1 0.7 0.4 0.2 1.2 1.0 Source: NHIES Data 4.36 Access to electricity. The majority of poor households rely on wood for cooking and heating (Table 4.19). Candles are the main source of lighting for poor households. A significant number also rely on paraffin for lighting. These two sources of lighting expose poor households to fire risks as evident in fire incidence resulting from the use of various lighting sources. Similarly, reliance on candles for lighting places children from poor households at a disadvantage in terms of studying and doing their homework. Candles do not provide sufficient lighting and due to household chores during the day, such children have no choice but to study by candlelight. 23 percent of the poor households have indicated that they have no source of heating. 4.37 Solar energy, which has a lot of potential in Namibia, continues to be an insignificant source of energy in Namibia. Only 0.1 per cent of poor households use solar energy for either cooking or heating and only 0.5 percent of non-poor households use solar energy for lighting and none use it for cooking. This is despite campaigns to promote solar electricity as an alternative source of energy. The cost of solar energy and installation of such facilities remain relatively expensive and hence the failure of household to adopt it. Table 4.19: Main Source of Energy for Poor Households Cooking Lighting Heating Electricity from mains 3.1 8.1 1.4 Other 0.1 3.2 0.3 None 0.1 1.0 23.3 Electricity from generator 0.1 0.4 0.0 Gas 1.6 0.1 0.2 Paraffin 2.1 20.6 0.6 Wood 90.8 10.5 70.9 Coal 0.1 - 1.6 Animal Dung 1.9 - 1.4 Solar Energy 0.1 0.2 0.1 Candles - 56.0 0.2 Source: NHIES Data 81 V. DETERMINANTS OF POVERTY 4.38 Cross-tabulation may confirm the association of poverty and various household characteristics. However, these do not confirm causation. The logistic regression analysis was employed here to establish factors that contribute significantly to poverty status.54 Logistic regression is useful in a situation where prediction of the presence or absence of an outcome is based on values of a set of predictor variables. It is similar to a linear regression but is more suited to models with dichotomous dependent variables. Its coefficients can be used to estimate adjusted odds ratios for each independent variable in the model. The analysis places importance on the likelihood or probability of the outcome. The response in this case is whether a household is poor or not poor. The dependent variable (dichotomous) takes on the value of 0 or 1, where 0 is not poor and 1 is poor. The explanatory variables are to be related to the occurrence of the dependent variable. 4.39 Poverty status was regressed against location (rural or urban), household size (large >5 members, small <=5), age and sex of household head, and salary, subsistence farming and old age pension as main source of income. Among these factors only location, household size, elderly as household head, and subsistence farming were found to influence a household’s poverty status. The results are of the logistic regression analysis are presented in Table 4.20. Table 4.20: Results of Logit Analysis on Poverty Status in Namibia B S.E. Sig. Constant -2.066 0.014 0.000 Location 1.839 0.013 0.000 Household size 0.200 0.009 0.000 Minor Household Head -0.252 0.031 0.000 Elderly Household Heads 0.045 0.011 0.000 Salary as Main Source of Income -0.869 0.013 0.000 Subsistence Farming as Main Source of Income 0.077 0.013 0.000 Pension as Main Source of Income -0.166 0.018 0.000 Female Household Head 0.001 0.008 0.879 R-Square 0.263 Source: NHIES Data 4.40 The location has positive significant relationship with poverty status, and rural, elderly headed households are more likely to be poor than households in urban areas. Household sizes also related positively with poverty status suggesting that large households are prone to be poor compared to small households. Minors as household heads have significant but negative relationship with poverty status. It implies that households headed by minors are not likely to be poor. This may be expected if such minors are beneficiaries of some inheritances or support from the state. The elderly as household heads have a positive and significant relationship with poverty status, suggesting that elderly headed households are potentially prone to be poor compared to household headed by other age categories. However, the estimated coefficient is relatively close to zero. 54 The use of logit regression also has its limitations in that it potentially discards some useful information and it requires strong distributional assumptions that are not required in an OLS regression on log consumption. 82 4.41 The salary as a main source of income has a significant but negative relationship with poverty status. It entails that households earning a salary are less likely to be poor. Subsistence farming as main source of income has a positive and significant relationship, suggesting those subsisting households are more likely to be poor compared to households that have other activities as main sources of household income. Pensions have a significant but negative relationship, which suggests that households relying on old age pension as main source of income may not necessarily be poor. The results suggest that the gender of the head of the household does not play a role in the determining the poverty status of the household. The coefficient for female-headed households is negative but insignificant. The R-square for the model suggests that there are other important variables that explain poverty status. The variables such as education, which is viewed as important to determining poverty status, were not included, as the structure of the survey data does not allow for such analysis. 4.42 The regional regression shows mixed results in terms of the significance of the explanatory variables used in the model (Table 4.21). Location is positive for all the regions, although insignificant for Kunene, which suggests that whether a household is rural or urban the odds of that it will be poor or not are the same. Household size is also significant for all the regions, but differs in association. Caprivi, Erongo, Hardap, Khomas and Oshana have a negative association, which suggest that a household be poor if it is large. The coefficients for the regions that are positive are relatively small, suggesting a weak association between poverty household sizes. Minor as household head is insignificant for Erongo, Khomas and Otjozondjupa. It is negative for Caprivi, Kavango, Ohangwena and Omusati. The elderly as household head is insignificant in Erongo. 4.43 Salary as a main source of income is only positive for Hardap, Karas, Omaheke and Otjozondjupa. There are positive coefficients for female as head of household for Karas, Khomas, Kunene, Omusati, Oshana and Oshikoto. It suggests that households are likely to be poor in these regions, if a woman heads them. Female as household head is insignificant for Ohangwena. The Erongo region has all the variables insignificant except for location and household size, which have positive and negative coefficients respectively. 83 Table 4.21: Results of Logit Analysis on Poverty Status by region Pension Main Source Salary Main Source Subsistence - Main Elderly Household Female Household Minor Household Household size Income Source R-Square Location Constant Income Income Head Head Head Caprivi 1.59 -0.33 -0.62 -0.07 -0.81 0.12 -0.01** -0.01** -1.15 0.22 Erongo 1.36 -0.43 0.12** 0.12** -0.06** -0.25** -0.18** -0.05** -3.03 0.06 Hardap 1.87 -0.45 0.48 -0.82 0.15 -0.24 0.61 -0.56 -2.11 0.20 Karas 1.71 0.19 0.30 0.21 0.18 0.72 0.15** 0.27 -2.85 0.16 Kavango 1.31 0.07 -0.35 0.59 -1.20 0.40 -0.30 -0.15 -0.92 0.24 Khomas 2.23 -0.06 -18.00** -1.02 -1.32 -20.51 -0.87 0.12 -2.70 0.14 Kunene 1.09** 0.00 -0.82 0.21 -0.76 1.19 0.81 -0.11 -1.41 0.29 Ohangwena 0.76 0.53 -4.21 0.32 -1.40 0.01** -0.07** 0.02** -2.31 0.10 Omaheke 1.56 0.07 1.03 -0.40 0.12 -0.57 0.52 -0.67 -1.44 0.15 Omusati 0.34 0.34 -0.19 0.28 -1.34 0.81 0.58 0.35 -1.47 0.15 Oshana 1.09 -0.13 0.86 0.27 -1.74 -0.07** -0.66 0.29 -1.27 0.25 Oshikoto 1.39 0.46 0.25 -0.13 -1.48 0.27 0.31 0.31 -1.58 0.25 Otjozondjupa 1.51 0.44 -20.01** -0.75 0.32 0.18 0.68 -0.67 -2.58 0.15 ** Not significant at 95 per cent significance level. Source: NHIES Data 84 VI. HIV/AIDS 4.44 HIV/AIDS represents probably one of the single major threats to developing countries and to their quest to develop. HIV/AIDS impacts on the standard of living of households since it not only affects income-generating activities of households but also affects consumption patterns. The pandemic can furthermore result in more households being headed by younger or older people because of the death of parents. The NHIES data set does not allow for a disaggregation of households affected by the disease and households that are not affected, since no questions in this respect were posed to the households. The following description of the trends in the spread of HIV/AIDS is based on other available sources. 4.45 Namibia is one of the countries with a very high HIV infection rate and HIV/AIDS has become the prime cause of death and hospitalization, accounting for about 28 per cent of deaths in all age groups. It is estimated that over 160,000 people aged 15-49 years were infected in 2000 and that around a 100,000 children under the age of 15 years have lost one or both parents. 40 per cent of these children are HIV/AIDS orphans. In the absence of a cure, containment of HIV/AIDS and the prevention of new infections remain the only available options. Containing and preventing the disease from further spreading will minimize its impact on the economy and development objectives. Namibia has various campaigns underway aimed at containing the disease, such as the provision of antiretroviral medicine and awareness campaigns to prevent further infections. The success of such efforts depends largely on an effective and accurate monitoring system. 4.46 Due to the sensitive nature of HIV/AIDS, there are few sources from which accurate and reliable information to compute relevant monitoring indicators can be obtained. Currently, the sentinel data, based on information obtained from pregnant women visiting health centers for antenatal purposes, is used to compute the HIV/AIDS prevalence rate. This prevalence rate is used to make inferences on the trends in HIV/AIDS in Namibia. Given that the sexual behavior of women and men may differ considerably, the accuracy and robustness of inferences based on the sentinel data is a major concern. There are other potential sources from which the HIV/AIDS prevalence rate can be calculated. The Voluntary Counseling and Testing (VCT) is a potential good source of data that can provide a more accurate and reliable prevalence rate. Comparing these data sets could assist in the improvement of the monitoring systems, which are used to gauge government and other stakeholder’s efforts against HIV/AIDS in Namibia. Further, if the two data sets can complement each other, this will provide a broader understanding of the HIV/AIDS phenomenon in the Namibia. In addition, we will briefly provide a short overview of the government’s strategy on HIV/AIDS in Namibia. Trends in the Prevalence Rate 4.47 Sentinel Surveys. The sentinel surveys are based on anonymous testing using blood samples obtained for antenatal purposes. It is conducted every two years and gives a point prevalence rate, which reflects a situation at a specific time. It is carried out among pregnant women and blood samples are forwarded for HIV/AIDS only after all personal identifying information are removed. The survey covered 14 sites in 1994 and 85 10 in 1996. Thereafter the number of sites was increased steadily to 24 sites in 2004. Similarly, the sample size has fluctuated with the lowest sample surveyed in 1996 (1,854) and highest in 2004 (4,373). In addition, many a site falls short of achieving the 250 observations per site. This was set as the minimum observations per site. In 1994, 1996 and 2000, only 5, 2 and 1 sites respectively had observation above the minimum of 250 observations. These problems undermine not only the consistency of the data, but also challenge its reliability and robustness. Further, it is not clear whether the specific points at which the sentinel surveys are carried out are based on any methodology on the most sexually active persons. This can result in the underestimation of the prevalence rate. 4.48 Table 4.22 shows the sentinel based HIV/AIDS prevalence rate, sample size, and the number of sites. The sentinel surveys were first carried out in 1992. The prevalence rate declined in 2004 for the first time since 1992. A correlation test between the sample size and prevalence rate suggests insignificant correlation between the average sample sizes. Further, the coefficient for the sample size suggests a negative but negligible effect on the prevalence rate. The coefficient for the number of sites is positive but also has an insignificant effect on the prevalence rate. Excluding the sites added in 2004 in order to compare the trend to 2002, the prevalence rate stood at 20.7 per cent. The decrease is smaller because the prevalence rate for two of the sites added in 2004 was below average. These suggest some degree of stoutness in the sentinel based prevalence rate, regardless of the sample size or number of sites. Although the prevalence rate declined for the first time in 2004, it is still very high and suggests that more needs to be done especially to prevent new infections. It is difficult to know whether the decline in the prevalence rate entail a fall in the infection rate or just reflects a change in women’s sexual behavior. This then suggests that HIV/AIDS campaigns are beginning to bear some success. Table 4.22: Overall Prevalence Rate 1992 1994 1996 1998 2000 2002 2004 Prevalence rate 4.2% 8.4% 15.4% 17.4% 19.3% 22.0% 19.7% Sample size 3,117 1,855 2,837 3,890 4,227 4,373 Number of Sites 14 10 15 18 21 24 Average per site 223 186 189 216 201 182 Source: Various Sentinel Reports 4.49 While the overall (national) prevalence rate appears to be stabilizing, there are huge differences among sites at which sentinel surveys are conducted. Figure 4.5 shows the prevalence rate for the sites that were surveyed from 1994 to 2004. There is an overall increasing trend in the prevalence rate for almost all the sites. Engela site showed a decline in the prevalence rate already since 2000, while Oshakati and Onandjokwe also show declines since 2002. While Opuwo site shows an overall steady increase, it continues to maintain the lowest prevalence rate since 1994. 86 Figure 0.5: Prevalence Rate at Centers Surveyed Since 1994 45.0% Katima mulilo 40.0% Sw akopmund 35.0% Oshakati 30.0% Windhoek 25.0% Onandjokw e 20.0% Rundu 15.0% Engela 10.0% Keetmanshoop 5.0% (incl.Luderitz) Opuw o 0.0% 1994 1996 1998 2000 2002 2004 Source: Various Sentinel Reports 4.50 Regionally, the prevalence rate shows a similar upward trend (Table 4.23). Most regions reached their peaks in 2002. However a significant number of regions (Erongo, Hardap, Kunene, and Omaheke) show an increase from 2002. Similarly, a significant number of regions suggest that that the prevalence rate may be sensitive to changes in the sample size. For Caprivi, Khomas, Ohangwena, and Omaheke, suggest an inverse relationship between the prevalence rate and the sample size, while the other regions suggest a positive relationship. However, the parameters for sample size suggest a minimal effect on the prevalence rate. 4.51 The evolving nature of sentinel sites has resulted in changes in the trend of the prevalence depending on whether a site includes a new area with a high incidence of HIV/AIDS. For instance, Windhoek initially consisted of Katutura hospital and later, was separated into Katutura and the Central hospital. Similarly, the Karas area excluded Keetmanshoop and Lüderitz. In 2004 Lüderitz was a site on its own. Further, the prevalence rate is not based on weighted data samples. Densely and sparsely populated areas are treated equally and hence may distort prevalence rate. Since the surveys are not random, sites are not necessarily comparable. Some sites may have a high HIV/AIDS incidence given their degree of vulnerability due location and types of economic activities. 87 Table 4.23: Regional Prevalence Rates 1994 1996 1998 2000 2002 2004 Caprivi 24.5 24.2 28.7 32.5 42.5 42.4 Erongo 5.0 17.4 22.2 24.8 20.5 27.0 Hardap 3.4 - - 9.5 11.2 12.2 Karas 10.0 - 6.7 16.7 16.3 16.2 Kavango 13.5 7.9 13.0 15.6 20.5 18.1 Khomas 21.1 19.2 28.4 28.9 28.6 18.0 Kunene 1.4 3.7 5.9 6.6 9.4 9.5 Ohangwena 15.2 17.5 19.0 22.6 23.1 20.1 Omaheke - - 9.1 9.4 12.8 13.3 Omusati - - - 20.9 24.7 21.3 Oshikoto - - - - 24.9 15.9 Otjozondjupa 8.9 - 16.4 17.8 26.9 22.7 Source: Various Sentinel Reports 4.52 VCT Prevalence Rate. The Social Marketing Association (SMA) carries out voluntary counseling throughout Namibia and provides the most comprehensive sample on HIV/AIDS since 2003. Unlike the sentinel surveys, its sample is mixed, consisting of both males and females, although males make up only 39% of those that have gone for voluntary counseling and testing. The coverage in terms of sites is still stabilizing. At the end 2003, SMA had six sites, which increased to sixteen in 2006. The observation period is relatively short and therefore trend inferences may be haphazard. The prevalence rate based on the VCT data, for 2003, 2004 and 2005, shows an increase from 2003 to 2005 and then a decline in 2005 (Table 4.24). Using the 2004 prevalence rate for both years, the prevalence rate appears consistent. The prevalence rate for 2004 shows a higher overall prevalence rate at 24% compared to 19% of the sentinel data. The VCT data shows a high prevalence rate among women than men although significantly more women appear to go for voluntary counseling and testing than man. This makes VCT samples also biased towards women. Similarly, the VCT data has a larger sample than the sentinel surveys. It grew from 4,006 to 22,199 individuals in 2005. Table 4.24: Voluntary Counseling and Testing Prevalence Rate Positive Negative Total Female Male Total Female Male Total Female Male Total 2003 434 221 655 1819 1532 3351 2253 1753 4006 2004 2145 1098 3243 6066 4247 10313 8211 5345 13556 2005 3361 1548 4909 10423 6867 17290 13784 8415 22199 Prevalence Rate % Females % Male % Total 2003 19 13 16 2004 26 21 24 2005 24 18 22 Source: VCT data 88 4.53 The VCT data appears to be more representative in terms of gender inclusion, compared to the sentinel data. Similarly, it is a large sample and is conducted over the whole year, compared to the sentinel surveys, which are point surveys. However, it may be handicapped if people do not appreciate the incentives of knowing one’s status. It may suffer from adverse selection especially if people who are potentially positive may not want to confirm their status, while on the other hand people who have taken risks might visit the centers. 4.54 Government Efforts. The Namibian government takes a proactive approach in the fight against HIV/AIDS and is directly involved in campaigns against HIV/AIDS. A National AIDS Committee (NAC) was established in 1990 to head the national response to HIV/AIDS. Further, the National Aids Coordinating Programme (NACOP) was established in 1999 to incorporate a multi-sectoral approach in the fight against HIV/AIDS. The Namibian government is spending about US$25 million a year on HIV/AIDS prevention, care and services. Government efforts include surveillance (sentinel surveys), prevention, and treatment, care and support and impact mitigation. Government has made antiretroviral treatment available through MoHSS and a significant portion of the Ministry’s resources goes to the fight against HIV/AIDS. It was planned that by the end of 2006 all 34 hospitals in the country were offering anti retroviral treatment. About 25 per cent of eligible patients are currently under treatment. The MoHSS has established extensive networks of health facilities that reaches deep into almost all the corners of Namibia. Further, the Ministry of Information plays a key role in the campaign against HIV/AIDS, coordinating the take control campaign, while the Ministry of Gender Equality is tasked with the support program for orphans and vulnerable children. 4.55 Meanwhile, a consultative process for the National HIV/AIDS Policy is underway at present. The policy is intended to deal with prevention, care and support of people living with HIV/AIDS, creating an enabling environment, impact mitigation, managing and monitoring the disease. Government is purported to be planning to commit a minimum of 2 per cent of the national budget to HIV/AIDS related activities. Other policies include the HIV/AIDS Charter of Rights (2000), and it is extensively dealt with in the NDPs and Vision 2030. VII. SUMMARY AND CONCLUSIONS 4.56 The high level of unemployment resulting from the economy’s inability to absorb labor in high productivity activities has contributed to poverty and a high level of income inequality. About 28 percent of households are classified as poor and 4 percent of households fit the definition of extremely poor in 2003/04.55 About 52 percent of the households and 60 percent of the population lives in the predominantly rural northern regions and these regions show a high percentage of poor and extremely poor households, suggesting a rural feature to poverty in Namibia. 4.57 The observed decline in poverty levels from 1993/94 to 2003/05 despite the huge loss of jobs in the agriculture sector is reflective of the growth potential in the economy. Based on the two NHIES surveys, poverty has declined between 1993/94 and 55 The poverty measure is defined in terms of household food consumption. 89 2003/04. There has been a decline in both the share of households that spend 80 per cent and more (severely poor) and 60 per cent or more (poor) on food. 4.58 A Gini-coefficient of 0.6 represents high income inequality and the levels of vulnerability remain significant. For instance, the dependency ratio remains high. Rural households are increasingly becoming vulnerable as productive bodies are attracted to urban centers where opportunities for wage employment are higher. Female headed households are more vulnerable than male headed households and also are discriminated against as reflected in wage differentials. There is a need to introduce a more robust stance towards equalizing opportunities and rewards for women. This will ensure that women have an equal opportunity to receive a reward for their human capital, and to provide women with stronger incentives to acquire education and skills, in turn reducing the segregation of women into particular occupations and raising their income potential. 4.59 The earnings differential between agriculture and all other industries is large reinforcing the low productivity in the sector identified in Chapter 2. The earnings differential between formal and informal (establishment with 5 or fewer employees) sector workers is also large. There is a huge financial advantage associated with stable employment with a large scale employer. Like other African countries, the informal sector is large in Namibia. The need to tackle informality should focus on improved access to formal jobs, particularly for vulnerable groups such as the young and women. There is a need for economic diversification sector wise as well as in terms of ensuring identifying other economic opportunities in rural areas. 4.60 While education appears relatively accessible, the quality is an issue as has been identified in earlier Chapters, with huge skills mismatches affecting the productive rebalancing of employment shares. The distances to education and health facilities appear manageable. While water is accessible for consumption purposes, there is a need to focus on access to water for productive activities, which can allow household to evolve out of poverty and reduce migration from rural areas. Similarly, there is need to intensify efforts to make electricity accessible, which will facilitate economic activities in rural areas. 4.61 Poverty is more endemic in rural areas, where agriculture jobs have been shed. This suggests that in order for poverty policies to be effective, they should be specially designed for rural areas. Further, the variation in the significance of the coefficient for poverty determinants analyzed, suggests that policy to fight poverty should go further and be region specific. 4.62 The threat posed by HIV/AIDS is real and its impact is being felt already. It is estimated that 160,000 people aged 15-49 years were infected in 2000 and that around 100,000 children under the age of 15 have lost one or both parents. There are regional differences and the Caprivi region shows the highest prevalence rates. The VCT prevalence rate estimated by the Social Marketing Association (based on voluntary counseling throughout Namibia) shows an increase in the prevalence rate from 2003 to 2004 from 16 to 24 percent and then a decline in 2005 to 22 percent. While the government is committed and has allocated significant resources to the fight against HIV/AIDS, the challenge is therefore to develop human resources to take advantage of the network for the purposes of fighting HIV/AIDS. 90 wth Prospects in Agriculture, Fisheries and Manufacturing 5.1 This chapter presents the key prospects for growth in the important sectors of agriculture, fisheries and manufacturing, and proposes a set of policies that would maximize the poverty-reducing impact of the growth engendered. In so doing, this chapter builds on the main findings of Chapter 3 on the binding constraints to growth, by “drilling down� to a deeper level of detail in these three sectors. 5.2 In agriculture, Namibia’s key constraint – and key opportunity – is in the meat export trade, and relates to the Veterinary Cordon Fence which defines the line between the disease-free south and the possibly diseased north of the country. For decades the government’s intention has been to extend the VCF northwards but so far very little progress has been made. Yet the difficulties are not insurmountable and the benefit-cost ratio is high: the main beneficiaries would be smallholders, and exports would increase. 5.3 Other opportunities in agriculture are in horticulture. Among these are products like table grapes in which Namibia has a natural timing advantage in that its seasons are different from those of its clients’. The government can play its part by improving the business environment as discussed in Chapter 3, and facilitating knowledge and technical transfer and promoting marketing information. 5.4 The products table grapes, ostriches and goats provide three parables about which policies are likely to succeed and which are not. The success story of table grapes arose from private sector initiative, attracted by duty-free quotas, with minimal government intervention. The expensive failed attempt to create an ostrich industry was based foursquare on state subsidies but after some years of effort it was realized that the Namibian ostrich industry could not compete with the South African owing to water shortages and high temperatures. And the prohibitive levy on exports of live goats, intended to optimize and promote the potential of domestic abattoirs and the leather sector in the country, has imposed large losses on goat farmers, and reduced exports, without leading to corresponding exports of processed goat products or leather.56 These three illustrations should be looked to when informing policy-making in the future: they show that government assistance in the form of infrastructure and facilitation is useful, and that direct interventions to grow particular industries rarely work because the private sector is a better judge of comparative advantage than the government. 5.5 In fisheries, given the country’s depleted stocks, there is little prospect for increases in output in the short term. Restrictions through quotas on various fish and a closed season on hake have led to 80 vessels being laid up in port. 5.6 In manufacturing, opportunities for diversification stem from links to agriculture and fisheries, i.e. agro-processing and fish processing, e.g. net making, processing of hake, leather products and processing of Karakul pelts. The challenge for Namibia will be to seek to negotiate with SACU to reduce the anti-export bias in the external tariff structure. Also, Namibia will need to negotiate with South Africa to reduce the intra- SACU barriers to its exports, because several attempts to develop new industries in the 56 A levy on exports of live sheep has been suspended and an alternative control system (a quota) has been introduced, administered by the industry through the Meat Board. 91 BLNS countries have been met with the introduction of non-tariff barriers by South Africa. 5.7 In addition, there will be an important role for Government, in particular, the Ministry of Trade and Industry to act as a facilitator. The Namibia Investment Center would be able to carry out the tasks of facilitating investment better if it were autonomous and better funded. The MTI also has a role in research and in this regard it is essential that the manufacturing census be carried out every five years. As has been stressed in Chapter 3 (on barriers to growth), the excessively generous incentives for direct foreign investment have not achieved their objectives and they should be scrapped in favor of a reduction in the rate of company tax which is on the high side compared with other aspirant industrializing countries. Further, as has been noted in Chapter 3, there is an urgent need to remove constraints to growth such as crime, corruption, difficulties of access to finance, and macroeconomic instability, high tax rates and poor worker skills. As regards the latter, the Ministry of Education, and the Ministry of Labor and Social Welfare, as well as the National Planning Commission should formulate and implement policies to satisfy the demand for skilled labor. There are also other important constraints, more global in nature, that serve to restrict the growth of developing countries like Namibia that have small domestic markets. These include distortions in the international trade regime and restrictions in major importing markets on products in which developing countries have a comparative advantage (e.g. agriculture) and also increases in the costs of transport and logistics to export markets brought about, in part, by the recent increases in the international price of crude oil and refined fuels. 5.8 Some success has been achieved in promoting the milk industry, entailing the use of infant industry protection as permitted by SACU. However, it is doubtful whether the repeated or systematic use of infant industry protection for other products would bear fruit in the long term; more likely it would trap the protected industries in a high-cost arrangement, and discourage downstream beneficiation. 5.9 The agriculture, fishing and manufacturing sectors are now dealt with in turn. I. UNLEASHING THE POTENTIAL OF THE AGRICULTURE SECTOR 5.10 There are two distinct farming systems in Namibia based on land tenure, farming method and market access. A strong large-scale commercial sector exists along with a small scale communal farming sector that is largely subsistence in nature. This inherent dualism and other factors, such as uncertain rainfall, a small and dispersed population and many years of social exclusion of the majority population by the minority one, mean that the Namibian economy has developed in a very specific way. Commercial (i.e., for profit) and communal (i.e., for survival) farming systems co-exist. Risk aversion remains the central characteristic of Namibian agriculture. Social and economic mobility still reflect the pre-apartheid order. 5.11 Following independence, the key tenets of Namibia’s agricultural policy are food self-sufficiency, poverty alleviation, welfare creation and job creation. More recent National Development Plans have replaced the food self-sufficiency stance with food security which better reflects Namibia’s food production potential and its desire to develop an open economy. The key tools that the Government has used to achieve these policy objectives have included: ambitious targets for land reform and resettlement, re- 92 structuring of agricultural services to concentrate available resources on the formerly disadvantaged, subsidy of infrastructure (particularly water supply in communal areas) and provision of research and extension services. Overview of the agriculture sector 5.12 The agriculture sector has two main parts, livestock farming and crop farming. Livestock farming constitutes a large part of Namibia agricultural output, contributing 70 percent of the total output of the sector in 1995 before easing to 59 percent in 2004 (Table 5.1). Crop farming, which accounted for only 8 percent of the total output of the sector in 1995, more than doubled, reaching 17 percent in 2004. Despite the observed significant growth of crop farming, livestock farming continues to dominate total agricultural output. The following section highlights the contribution of the key sub- sectors to the development objectives. Table 5.1: Agricultural Output (current prices - N$ million) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total Output 1,240 1,381 1,398 1.532 1,676 1,880 1,719 2,372 2,184 2,007 Commercial 849 1,020 917 1,192 1,167 1,074 1,333 1,824 1,654 1,369 Livestock 803 963 827 1,106 1,046 978 1,188 1,676 1,467 1,180 Cattle 437 544 395 660 486 361 699 732 934 637 Sheep/goats 168 141 178 206 342 335 253 620 385 285 Pigs 6.1 5.5 2.7 1.8 2.9 2.9 0.7 (1.4) 4.8 10.4 Karakul 8.0 9.2 6.7 15.2 12.7 14.8 19.5 17.9 20.2 11.0 Dairy (milk) 20.0 25.0 28.9 30.1 30.7 34.4 41.4 50.1 52.1 58.1 Hides, skins 96.6 109.7 93.3 108 125 138 77.0 160 30.0 98.0 Other 67.8 129.6 121.5 84.8 47.5 91.7 97.7 72.2 42.7 80.7 Crops 46.0 56.5 90.4 86.5 120 96.4 146 148 187 189 Maize 12.9 14.5 34.6 14.9 15.8 26.4 37.1 35.8 56.3 73.8 Wheat 5.3 2.8 4.2 5.6 3.1 4.3 9.4 13.5 19.0 15.2 Grapes 21.8 30.0 39.6 51.8 80.9 44.4 74.7 84.2 92.8 86.2 Other 5.9 9.2 12.0 14.1 20.5 21.4 24.3 14.4 18.6 13.5 Communal 345 361 391 254 390 710 241.1 401 343 450 Livestock 143.7 102.4 90.1 25.8 148.4 395.1 (68.4) 87.6 (41.5) 5.8 Table 5.2: Agricultural Gross Domestic Product (constant 1995 prices – N$ million) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Agriculture 872 1005 926 909 1016 1056 899 975 1010 1025 - Commercial 517 602 519 489 502 648 589 723 755 687 - Subsistence 355 403 407 420 513 408 310 252 255 338 Source: Bennett (2007), in turn from Bank of Namibia, various years 93 Livestock Farming 5.13 Livestock production and marketing is an important element of the economy. Livestock husbandry – cattle, sheep, goat, pig and ostrich – contributes 98 percent of national agricultural income and meat contributes 90 percent of agricultural export earnings and about 15 percent of total export earnings. 5.14 Beef. The major beef producing areas in Namibia are the north and east central regions. The main markets are local abattoirs; the informal market in the Northern Communal Areas; South Africa; and Europe. Since the early 1990s commercial beef production declined from 1.2 million head in 1992 to 0.9 million between 2000 and 2004; and the total number of cattle marketed has declined by about 9 percent between 1995 and 2005 (Figure 5.1). The problems are bush encroachment and the uncertainties emanating from the land reform process. 5.15 There was massive growth in the communal sector, from 1 to 1.5 million head, probably resulting in over-grazing exacerbated by the free entry nature of the communal tenure system. Marketing off-take has historically been low – about 5 percent via the commercial system, and possibly 10 percent in local informal markets. There are cultural reasons for this, cattle being a store of wealth, but also there is poor selection of breeds, a low bull to cow ratio, foot and mouth disease, and inadequate extension work. There are serious difficulties with marketing, especially the costs of the quarantine requirement for marketing cattle south of the VCF. Meatco, the parastatal with a monopoly on commercial meat marketing, runs two abattoirs in the north, but these usually make losses due to low throughput. Figure 0.1: Namibian Cattle Populationa, 1993-2004 1.60 1.50 1.40 Head (million) 1.30 1.20 1.10 1.00 0.90 0.80 93 94 95 96 97 98 99 00 01 02 03 04 Ye ar Commercial Communal a Number. of cattle, five year rolling average starting in 1989. Source: Meat Board of Namibia, personal communication and Directorate of Veterinary Services Note: ‘Communal’ production in this graph refers to all open tenured land areas in Namibia, both North and South of the VCF 5.16 Small stock. Small stock production is the main agricultural activity in the arid south. In 2004, sheep were 57 percent of all small stock, goats accounting for the rest. 94 The prime brands of sheep are Dorper and boer, while the Karakul, bred for pelts, accounted for only 4.4 percent. While Namibia is the largest exporter of live sheep and goats in Africa, the marketing of small stock fell by 11 percent from 1995 to 2005 (Figure 5.2). Practically all of Namibia’s export of small stock goes to RSA. Traditionally, sheep for export are raised on both commercial and communal farms, aggregated for export by middlemen and shipped to abattoirs in RSA. Much of the decline in production and marketing is attributed to the communal sector. 5.17 The number of small stock marketed on hoof to South Africa declined from 1 million to 600,000 in 2004 and to 400,000 in 2005. Correspondingly the number marketed to Meatco rose by 20,000 in 2004 and by 200,000 in 2005. Summing, the net decline was 380,000 animals over the two years. Such was the effect of the Small Stock Marketing Scheme of April 2004 (Meat Board 2004). The plan was to increase value addition and increase local employment, and promote the leather industry, by requiring that the abattoirs’ capacity be fully taken up before exports occur. So in 2004 the Meat Board required that for every animal exported, two had to be slaughtered locally57, and then it increased the ratio to six to one in 2007. The stock suppliers were supposed to be compensated by being paid prices equal to the South African prices, but in the end the prices were much lower and there were losses of some N20 million (about US$ 2.8) in 2006 (Kahuika et al., 2006). There were further losses by farmers who did not even market their animals in the knowledge that the returns would be lower. Figure 0.2: Marketing of small stock 1,600,000 Animals marketed in ’0000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Export Abattoirs Local Butcheries Years RSA(LIVE) TOTAL 5.18 The Scheme amounts essentially to a near-complete quantitative restriction on exports. Even with the increase in employment at the abattoirs, the economy has suffered a large net loss. In addition, it is not clear that demand yet exists for the processed goat products. The measure happened to follow the construction of two new abattoirs (one the converted ostrich abattoir, see below), whose services were largely unused; the abattoir bailout has come at a great cost to the industry, and in particular for small-scale farmers. The Scheme should be scrapped and replaced with more durable and less costly means of promoting the beneficiation: facilitation of information and technology, training, assistance in marketing processed products domestically and abroad, thereby allowing actual realized demand to dictate the price and enabling the abattoirs to offer a 57 The only exception to this ban is weaners which may be exported to South Africa on hoof. 95 combination of services which the goat producers might find more attractive than exporting. This should not be difficult given the problems with the on-hoof exporting market – one-third of animals die in transit. 5.19 The Karakul sheep is the most common pelt producing sheep in Namibia. Subsequent to the recovery of the world price for Karakul pelts (the average price of pelts increased by over 500 percent between 1995 and April 2006), the Namibian Government proclaimed the Karakul industry as a strategic industry for the social economic development of the locals in 2006. To this effect there are efforts to increase the production of Karakul in the rural areas58. However, the government has yet to develop a strategy with key stakeholders on how to revive the production of Karakul. 5.20 Ostrich. From 1996 to 2006 the Government of Namibia subsidized the emergence of an ostrich industry through loan guarantees and write-offs. Ostriches, it was hoped, might be a solution to the declining returns on small stock and the lack of alternative livelihood opportunities in the south of Namibia. An export standard abattoir was constructed at Keetmanshoop. Commercial farmers were encouraged to invest and communal farmer cooperatives were engaged in an outgrowing program to provide employment in areas of southern Namibia where there is little productive potential. Like other niche industries the development of the ostrich sector was dependent upon its reaching a critical mass. This was never attained. As the industry declined, the processor found that in order to cover fixed costs he had to reduce the factory gate price. As prices declined, commercial farmers moved out of ostrich production and throughput fell ( 5.21 ) leading to further price declines. In real terms, factory gate prices declined by more than 50 percent between 1996 and 2004. Figure 0.3: Ostrich Production 70000 60000 Number of birds 50000 40000 30000 20000 10000 0 95 96 97 98 99 00 01 02 03 04 Year Number of birds (from cens us ) Birds s laughtered Source: GRN (2004:24) 5.22 With hindsight, the sector lacked genuine competitive advantage. Namibian ostriches needed a more expensive, imported feed than their competitors in South Africa and hat high daytime temperature and lower quality breeds meant that average times to 58 Including the ram project, the Kunene South project and training. 96 attain slaughter weight were several days higher in Namibia.59 The ostrich meat market could not carry the industry alone. The ostrich industry collapsed in December 2005 with the conversion of the export abattoir to full time processing of small stock. 5.23 Dairy. In 2000, Namibia Dairies and the Milk Producers Association embarked on an expansion program which centered on the construction of one million liter per annum UHT milk plant, a packing factory and storage facility in Windhoek. This new investment was supported by the government, which applied to the Customs Union for infant industry status to allow a tariff to be levied on UHT milk imported from within the Customs Union for a period of eight years60. The net result of these measures was a steady rise in milk production (Figure 5.4). Figure 5.4: Milk Production Milk production (’000l) 24,000 22,000 20,000 18,000 Litres 16,000 14,000 12,000 10,000 93 94 95 96 97 98 99 00 01 02 03 04 Year Source: GRN (2004: 25) 5.24 The dairy sector fell victim to wider changes in regional policy in 2005. Low tariffs on processed cheese in SACU meant that EU cheddar was flooding into the RSA market and RSA dairies were sending their cheese to Namibia at prices lower than production cost. The matter was taken to the SACU Standing Committee on Agriculture but remains unresolved. Commercial dairy production depends on managing milk supply, fresh milk, UHT milk and cheese, and production costs are such that the failure of one element of this group renders the whole sector unviable. Dairy shortages, price increases became acute in 2007. Crop Farming 5.25 Pearl millet (“Mahangu�), is the major crop and the staple food in the north and central regions. Its drought tolerance and good keeping qualities lend themselves to the risk aversion strategies evolved by subsistence farmers in the dry-land agro-pastoral eco- system prevalent in northern Namibia. Yields are low as no fertilizers or pesticides are used, and few improved seed varieties are adopted. However, total failure is rare and, 59 An internal report prepared by the MAWF in 1997 on the economics of Ostrich production clearly identified these problems, but was ignored. 60 At the time an external tariff protected SACU as a whole from UHT and powdered milk imports. 97 because long term storage is possible, bumper years can make up for lean ones. Total production of Mahangu increased from 35,000 tonnes in 1996 to 95,000 tonnes in 2005. Contrary to wheat and maize, Mahangu is mostly utilized for domestic consumption only. 5.26 Rural electrification has encouraged the emergence of a local level grain hammer milling sector. There are about 500 small millers. Consumers prefer millet that has been slightly fermented, a quality that has, to date been difficult to replicate in commercial milled grain (Dendy 1993; Mallet and du Plessis 2001: 34). However, tastes are changing. Market research demonstrates that young, city dwelling Namibians are turning from pearl millet to maize and wheat based products (CIRAD 2002). The combination of rapid urbanization and young demographics do not bode well for the future of the grain in its traditional form. 5.27 Measures to enhance millet productivity such as improved seeds and better post harvest handling would have substantial benefit for the poorest in rural Namibia, particularly those without access to livestock. Labor-saving measures such as draft animal power and improved weeding technology are becoming increasingly important as rural-urban migration and HIV/AIDS impact upon the demographic make-up of the millet growing areas of Namibia. 5.28 White maize is the predominant subsistence food crop in the Caprivi and Kavango regions. The majority of white maize farmers use saved seeds and no external inputs, though there are some 500 semi-commercial maize farmers growing under rain-fed conditions in the Kavango. Commercially, white maize is grown in the so-called ‘maize triangle’ (the area bounded by Tsumeb, Grootfontein and Otavi). When the price is favorable, it is also grown under irrigation. Namibia depends on imports of maize from South Africa for consumption purposes. In 2004, maize imports accounted for 61 percent of the total consumption of white maize in Namibia, compared to 95 percent in 1995. The importation of maize is controlled by the Namibian Agronomic Board (NAB) through import permits. The milling of maize is performed by 26 millers, dominated by Namib Mills and Bokomo, a South African company. 5.29 Wheat. Wheat is planted under irrigation in winter (June/July) for harvesting during November/early December of each year. Wheat marketed in Namibia increased significantly by 89 percent from 6,000 tonnes in 1994/95 to 11,340 tonnes in 2004/05. Namibia is far from self sufficiency in terms of wheat consumption and depends heavily on imports. Imports accounted for 88 percent of the total consumption of wheat in 2004. Wheat imports are also controlled by the NAB through permits. Only raw wheat may be imported as the importation of wheat flour is controlled by SACU. Wheat is milled by two companies, Namib Mills (85 percent) and Bokomo Namibia (15 percent). 5.30 Sorghum. The potential of sorghum as a cash and subsistence crop with drought resistant benefits is not strong. Traditionally, most farmers produce a little sorghum for beer brewing. Following the trend in the region, younger people see sorghum based beverages as old fashioned and have moved onto larger type beer and coke. Thus efforts by the Government of Namibia to promote sorghum (a new bird resistant variety has been developed, for example) have not met with much success. Problems need to be overcome on both demand and supply side to make sorghum a successful cash crop: improving 98 yields, promoting collective marketing and upgrading from raw product to semi- processed or processed product. 5.31 Grapes. Namibia harvests high quality seedless table grapes for export to Europe, China and the Middle East. Namibian table grapes had been the first to reach the European market, while competitors could only reach the market a month latter. This advantage was mainly due to climatic conditions which enabled the Namibian grown grapes to ripe earlier. Consequently, the production of grapes increased from 2,298 tonnes in 1995 to over 15,000 tonnes in 2006. This advantage has been somewhat eroded by competition from Chile, as attested by a gradual decline in the price of grapes since 1999 (Figure 5.5). Figure 0.5: Grape Production and Prices – 1995-2007 20,000 14,000 12,000 15,000 10,000 N$/mt 8,000 Mt 10,000 6,000 5,000 4,000 2,000 - - 95 96 97 98 99 00 01 02 03 04 05 06 07 Year Production (mt) Price (N$/mt) GRN Source: (2005) and (Hoffmann 2004). 5.32 Other horticultural crops that are cultivated in Namibia include sunflower, cotton, ground nuts, dates and lucerne. Moreover, communal farmer groups with the assistance of NGOs are producing fruits and vegetables such as cabbage, carrots, green mealies and pumpkins along the Okavango and Zambezi rivers. Along the Olushandja Dam and at the Etunda Project, fruits and vegetables such as tomatoes, cabbage, watermelons,61 sweet-melons, onions and butternuts are being produced. Furthermore, in the areas of Tsumeb, Otavi and Kombat a number of farmers are successful with horticulture production. The Okahandja and Hochfeld areas also produce potatoes and onions, most of which are being exported to South Africa. 5.33 Only 20 percent of fresh produce consumed in Namibia is supplied locally. Local producers find it difficult to penetrate the local market and as a result are constrained from increasing their market share. This is due to inadequate local marketing infrastructure and marketing strategies. Moreover, the Namibian fresh produce is inadequate to provide consistent supply to the market for the whole year, and therefore wholesalers rather opt to source their supply from South Africa. Consequently, some producers have to send their produce to the Cape Town fresh produce market. This practice is common with onion and potato producers in Hochfeld area and tomato 61 Watermelons, sweet-melons, onions and butternuts are being exported to South Africa. 99 producers along the Orange River. The latter find their way back to Namibia through the wholesalers. Distances are long and transport is not synchronized and is thus expensive. Key issues and constraints 5.34 Market access. The existence of the VCF makes the growing number of cattle in the northern regions unavailable for exports.62 The return on cattle brought to the market by the farmers north of the VCF is low. As mentioned earlier, only 1.7 percent of cattle north of the VCF were sold through export abattoirs. As a result, Namibia has not managed to fill its duty free quota to export 13,000 tonnes of meat to the European Union under the Cotonou agreement. This is also due to bush encroachment in the commercial areas and to a switch of many commercial farmers from cattle to game farming, as well as the uncertainties emanating from the land reforms. The latter stems from the fact that farmers are uncertain as to which farms are targeted by the land reform process and as a result are discouraged from investing in farming. Within the communal areas production is hampered by the poor selection of breeds, the low bull to cow ratio, foot and mouth disease and the low extension worker/farmer ratio. Water and inadequate grazing are also constraints in the areas such as Ohangwena, Oshikoto, Kavango and Kunene, respectively. Box 3: What evidence of market failure in Namibia’s meat sector? In his review of the policies to encourage marketing of livestock from North of the VCF Vigne (2005) argues that the causes of market failure are not existing GRN policies (i.e., free extension and veterinary services) but result from other factors. These include: limited market access and therefore competition as a result of the VCF; reduced market efficiency as a result of single channel marketing); high quarantining costs (time, distance/remoteness, losses in quarantine); poor rural infrastructure constraining the emergence of informal (and formal) markets (i.e., feeder roads, credit institutions, cell phone coverage, electricity coverage); market distortion from open access grass land; lack of collateral for investment in the production and marketing system. 5.35 Agricultural Finance. While access to finance is not considered to be a binding constraint overall, two issues pertaining to agricultural finance still need to be resolved. Firstly, Namibian law only allows certain bodies to take savings and greatly limits the number of banks or second-tier credit businesses operating in the country. This reduces flexibility and limits competition, particularly in rural areas. Secondly, the use of leases given under the new Communal Land Act for collateral is not allowed. Such a provision could open new opportunities for resettled farmers. 5.36 Contract farming, or outgrowing farming, could provide a useful source of finance, as well as output markets, and technical assistance, in specific horticultural crops. Given the natural co-variance of risk in the agricultural sector, the chances of building a successful agricultural credit system for small-scale farmers outside of the contract or outgrowing context, is remote. 5.37 Trade. Regional and international integration into the world trading system represents an opportunity rather than a threat to the sector. The challenge will be to 62 The cattle population North of the VCF has nearly doubled since 1989. 100 ensure that the poor benefit from the opening up of markets. Table 5.3 below gives some examples of products where Namibia has some potential comparative and competitive advantages. It suggests that much more could be done to develop market led strategies for existing and new Namibian products. In particular, empowering the private sector to reach developed markets outside traditional ones could be a beneficial strategy for the sector as a whole. Table 5.3: Examples of Opportunities Arising From Trade Integration Product Opportunity Threat Beef New regional and international markets Preference could be eroded by from for products that meet the highest new, lower cost, countries with the veterinary standards same high standards Lamb Regional markets for lamb not fully Increasingly, African middle classes explored are buying from supermarkets – many RSA chains Goat Regional and international markets for Goat is traditionally purchased ‘on-the goat not fully explored hoof’. Urbanization and formal employment is changing consumption patterns towards more convenient meats such as frozen chicken Horticulture Counter-seasonal production potential within the region not fully explored 5.38 Bush encroachment is causing substantial production losses, mostly in commercial farm land. It is caused by fire suppression, over-stocking of livestock and removal of game. The relative importance of these factors is unknown and should be researched. The economic viability of redressing the problem remains uncertain. Agricultural activities with demonstrated potential 5.39 By the revealed comparative advantage measure, Namibia should be able to expand its production of cottonseed, hide, karakul pelts and raisins (Zaaruka and Namakalu, 2002). 5.40 Livestock. Potential for further expansion in beef and karakul exists if production were to be increased in the communal areas. In the case of beef, this potential could be unlocked if the veterinary fence could be expanded northwards by creating extra disease free clusters. Similarly, the production of the Karakul sheep and pelts in the communal areas should be intensified by providing incentives to communal farmers. 5.41 Indigenous plants. Namibia has indigenous plants with unique properties. The world market for ‘new’ and ‘novel’ plants and plant extract is growing quickly.63 Creating markets for wild harvested natural resources can promote conservation through ownership. It is a cost effective method of reaching the poor. Policy measures to encourage ownership of extensive resources and common property management are needed. 5.42 Table grapes. The success story of grapes cited in paragraph 5.31 was driven by the offer by the European Union of a general tariff free quota to the African, Caribbean 63 The global market for “natural products� has been estimated at US 65 billion a year (see http://www.phytotradeafrica.com/downloads/Natural-Futures-press-release.pdf) 101 and Pacific (ACP) countries, including Namibia, of 800 tonnes of seedless table grapes in December and January each year duty free. This is a reduction from an 8 percent tariff to zero.64 Some 3,500 jobs have been created at relatively little expense to GRN (loan guarantees to a few resettled farmers) and, seasonally, about 7,000 extra workers are needed. There will be some further costs: a new town will need to be founded, in an sensitive to habitation, and mitigation measures will be needed for the impact of irrigation and habitation on the Orange River eco-system. 5.43 The potential for increasing output for the grapes depends on finding new markets, and the processing of raw grapes into brandy and grape juice. Potential markets for grapes include the USA, Middle East and the Eastern block. After many years of effort by USAID and the government, in 2006 Namibian grapes finally qualified for export to the USA. A distillery which process grape into brandy is being envisaged. Processing of grapes into juice could also be considered in the medium to long term. 5.44 Jatropha Curcas is a drought resistant plant that produces plum-size fruits with oleiferous seeds. It needs only 500 mm of rainfall per year. The leaves and oil seeds can be used as traditional human and animal medicine, disinfectant, purgative, rheumatism, insecticide, and in soap, fertilizer and energy production. Moreover, Jatropha oil can be used as lubricant and biodiesel for motor vehicles. A study by the Namibian Agronomic Board showed that if 63,000 hectares of Jatropha were planted, it would raise GDP by N$189 million and revenues by N$124 million. 5.45 Succulents, or water-storing plants, can survive in harsh dry environments; examples are Hoodia and the cactus pear. Hoodia is prized for its appetite suppressant properties. Cactus pear, found on most commercial farms, can be used for consumption as fruit, jam making, alcohol, face lotions, hair gels and shampoos. 5.46 Other horticultural plants have a potential because they ripen earlier than those of competitors, e.g. avocados, banana, beans, beetroot, broccoli, butternuts, cabbage, carrots, chilli, cucumber, dates, grapes, lemon, lettuce, mango, naartjies, onions, oranges, pears, pineapples and potatoes. Conclusions In order to unleash the potential in the agricultural sector, it is recommended that : 5.47 Market access for communal farmers should be improved. Concerted efforts should focus on expanding marketing opportunities in the communal areas for beef and horticultural products. More specifically, the extension of the VCF by creating disease free clusters to the north should be encouraged, while the usage of feed lots in the communal areas should be used intensively. Efforts to find new markets for promising crops like grapes and livestock products like goat meat should also be intensified. Alternatives to the expensive ineffective Small Stock Marketing Scheme should be found. 64 EU Council Decision 483/200 OJL 105 of 1 August 2000. 102 5.48 Transport infrastructure should be improved. The government should ensure that good infrastructure in the form of roads; electricity and markets are put in place to connect the production in the rural areas to the markets in the urban centers. 5.49 Implementation of land policy should become more strategic. The land policy must be implemented in such a way that it dispels uncertainties’ to farmers, i.e. areas earmarked for resettlement must be defined clearly. Resettled farmers should be grouped into clusters in areas in the vicinity of markets and well equipped with the necessary infrastructure in order to enhance productivity. 5.50 Research and extension services should be intensified. Agriculture research should focus on overcoming the constraints to growth in low-input, low-output communal farming systems. In addition to research, there is a need to enhance the productivity of agricultural workers and value-added in crop production by providing training in high value crop production. This could be done through specialized agricultural institutions and agricultural colleges. Moreover, small holder farmers should be trained on budgeting and proper selection of breeds. The usage of veterinary technicians in rural areas should be intensified to reduce the incidence of cattle disease and raise livestock productivity. II FISHING 5.51 Fish and fish processing is, after services and mining, Namibia’s third largest industry, accounting for 17.8 percent of Namibia’s total exports of goods and services between 1995 and 2005. The fishing sector grew on average by 3.2 percent per year between 1995 and 2005, but in 2004, 2005 and 2006 registered declines of 9.1 percent, 3.4 percent and 0.8 percent respectively. While the sector has benefited from higher world prices of fish, increased fishing costs (from rising crude oil prices), the appreciation of the Namibian dollar and lower catches have had an adverse impact. Depleted fish stocks (particularly for pilchards) due to overfishing65 have hampered the development of the fishing industry even though restrictive catch quotas, the levies from which are an important source of government revenue, have aimed at rebuilding these.66 5.52 The fishing sector is entirely commercially operated. Because three-quarters of Namibia’s population lives predominantly in rural areas inland, almost no artisanal fishing takes place (FAO, 2007c). The fisheries sector employed 12,720 workers in 2004, up from 6,771 in 1997, with 60 percent of these working in processing plants. Namibian employees account for 80 percent of workers in the fishing sector (68 percent of sea-going employment and 98 percent of on-shore processing employment) (Lyambo, 2003). To promote the employment of Namibians within the fishing sector, quota fees are lower for Namibian vessels and fishing rights are granted to Namibian fishing companies 65 Before the country’s independence, Namibia’s fishing sector was dominated by foreign firms from Europe and South Africa which often led to over-fishing of higher value species. More than 100 vessels fished illegally in Namibia’s waters in 1990 (Nichols, 2003). In 1968, the pilchard catch was 2 million tons; hake catches peaked in 1972 at 800,000 tons and horse mackerel catches reached 570,000 tons in 1982. These catch levels were not sustainable and left commercial stocks severely depleted prior to independence in 1990 (FAO, 2002). Following independence, Namibia dramatically reduced the number of foreign trawlers allowed to fish its waters (Oelofsen, 2003). 66 Government revenue from the fishing industry rose by more than 30 percent between 1998 and 2002 to N$131.8 million (Ministry of Fisheries and Marine Resources, 2004b). 103 for a period of ten years (versus seven years for joint ventures) (Meyn, 2005). Foreign vessels can only operate with local fishing-right holders and all fish caught by such vessels must be landed in Namibia (FAO, 2007c). Firms that promote fish processing activities and training of Namibian workers enjoy tax deductions (Erastus, 2002). Though more than 90 percent of the fishing industry is either wholly or majority owned by Namibians, the benefits of the sector are claimed to accrue insufficiently to Namibians. Many companies that were formally foreign-owned now have a 51 percent Namibian share, thus only just fulfilling the requirements of a locally-owned firm (Meyn, 2005). 5.53 Total fish landings increased from 512,624 tons in 1997 to 569,310 tons in 2004 (see Table 5.4). Table 5.4: Landings of Main Species, 1997-2004 (000 tons) Species 1997 1998 1999 2000 2001 2002 2003 2004 Total 512.6 607.3 579.3 589.3 546.9 624.4 635.3 569.3 Mackerel 301.8 312.4 320.4 344.3 309.4 359.2 366.9 314.5 Hake 117.7 150.7 164.3 171.4 173.3 156.5 192.3 173.9 Pilchard 27.7 68.6 44.7 25.4 7.9 4.2 22.3 28.6 Monk 10.3 16.4 14.8 14.4 12.4 15.2 12.9 9.0 Kingklip 2.5 2.2 3.7 3.9 6.6 7.9 7.2 7.5 Tuna 1.2 1.4 1.2 2.4 3.4 3.0 3.2 3.3 Rock lobster 0.2 0.35 0.30 0.37 0.36 0.36 0.25 0.21 Anchovy 2.5 2.7 0.4 0.1 2.1 41.2 1.6 2.2 Other 48.7 52.6 29.5 27.0 31.4 36.8 28.6 30.1 Source: FAO (2007b). 5.54 The hake industry is the biggest sub-sector, contributing more than half to the value of output of the sector, attracting the most investment in the fishing industry67 and employing 70 percent of workers (Erastus, 2002; Ministry of Fisheries and Marine Resources, 2004a). By volume, mackerel make up over half of Namibia’s total annual catch, although its value is much less that that of hake or pilchard. Most mackerel are caught by large, mid-water trawling freezer-vessels operated by a joint venture with Russia, and unlike hake and pilchard are not landed for onshore processing. Other important fish sectors include tuna, rock lobster (based in Lüderitz) and crab. 5.55 With depleted fish stocks, catch levels cannot be increased in the short term. The main fish catches for the most valuable species (hake, monk, and kingklip) are strictly regulated by quotas for total allowable catch (see Table 5.1).68 In April 2006, Namibia cut its total allowable catch for hake, monkfish and orange roughy in the 2006/07 fishing year. In addition a four-week closed season has been introduced for hake fishing during the breeding period in October. Consequently this has led to 80 vessels being laid up in port and workers being placed on temporary leave. 67 Total capital investment in fishing vessel and shore infrastructure for the entire fishing sector has exceeded US$200 million since 1990 (Nichols, 2003). 68 The Ministry of Fisheries and Marine Resources sets TAC limits for seven species based on its assessment of fish stocks. 104 Table 5.1: Total allowable catches in Namibia (tons) 2000 2001 2002 2003 2004 2005 2006 Mackerel 410,000 410,000 350,000 350,000 350,000 350,000 360,000 Hake 194,000 200,000 195,000 180,000 195,000 180,000 130,000 Pilchard 25,000 10,000 0 20,000 25,000 25,000 25,000 Monk n/a 13,000 12,000 12,500 12,000 11,500 9,500 Rock 35 400 400 400 420 420 420 lobster Orange 2,400 1,875 2,400 2,650 2,600 2,050 1,100 Roughy Crab 2,000 2,100 2,200 2,000 2,200 2,300 2,400 Source: Tutalife and Motinga (2007). 5.56 Namibia’s fishing industry relies on preferential access to the EU market. Over 90 percent of fish caught are exported, mainly as processed fish to Europe (70%) and South Africa (20%). The main species exported are hake and monk where 75 percent and 95 percent of total production, respectively, are sold to the EU market, mainly Spain, France, Germany, Italy and Portugal (Meyn, 2005). Under the ACP/Cotonou Agreement Namibia receives duty free access to the EU providing a tariff preference of 22 percent for fresh fish and 24 percent for preserved fish compared to imports from MFN countries. Other major markets for Namibian fish can be summarized as follows: canned pilchard to South Africa; horse mackerel to the Democratic Republic of Congo, Mozambique, South Africa and Zimbabwe; and, rock lobster and crab to Japan. III. UNLEASHING THE POTENTIAL OF THE MANUFACTURING SECTOR69 5.57 The main principles of the country’s industrial policy are equality, the reduction of poverty, increased growth through product and market diversification. Furthermore, the policy gives preference to the promotion of small and medium-scale enterprises because of their capacity to create jobs. This policy framework is guided by broader national documents such as the National Development Plan II (NDP2) and Vision 2030 which suggests that the contribution of the manufacturing sector should grow significantly in order to achieve the national development policy objectives, particularly with regard to the absorption of labor. 5.58 Since independence, Namibia has had very limited industrial development and continues to import most manufactured products, mainly from South Africa. This is evidenced by the limited range of manufactured products that the country is able to export. As discussed in Chapter 2, manufacturing has an unusually low share of Namibia’s national output, employment and exports compared to other middle income countries such as South Africa. In Namibia the sector accounted for an average of 10 percent of GDP for the period 1995-2005, and less than 7 percent of total employment in 2004. In the case of South Africa, the sector accounted for an average of 17 percent of its GDP for the period 1998-2004, 9 percent of employment and 40 percent of its total exports. 69 This section draws on the BON Research Department Paper Assessing the potential of the manufacturing sector in Namibia. 105 5.59 In addition to the relatively low share of manufacturing in GDP, employment and exports, the growth in Namibia’s manufacturing sector output has been relatively low registering an average growth rate of 3.0 percent for the period 1995-2005 (see Appendix 1), when GDP as a whole grew at 4.1 percent annually in the same period. More recently, growth in 2006 has been on the back of increased prices for processed copper, zinc and polished diamonds and is therefore vulnerable to developments in the international markets. 5.60 Against this backdrop, and recognizing that manufacturing sector has the potential to absorb unskilled labor, a critical issue facing Namibia, the main objective of this chapter is: (i) to review the current status of the manufacturing sector in Namibia; (ii) identify the key constraints to its growth and suggest possible policy options; and (iii) to assess potential for diversifying the manufacturing sector with a view to creating jobs. Overview of the Manufacturing Sector 5.61 The food sub-sector accounts for 52 percent of total manufacturing output (Table 5.2). Fish processing is the next largest single sub-sector, representing 18 percent of the sector, while meat processing is third at 7 percent. Manufacturing sector inputs are largely generated from the agricultural sector (meat, milk) and the fishing sector. Within “other manufacturing�, the main contributors are the fabricated metal category (24 percent of other manufacturing), followed by chemicals and plastics (22 percent), basic metals (17 percent) and non-metallic minerals (12 percent). Table 5.2: Composition of Manufactured Products (in percent) Meat Fish Food Other Total Processing Processing Products Manufacturing* Manufacturing 1995 8.4 26.7 36.9 28.0 100.0 1996 8.8 9.5 40.1 25.5 100.0 1997 6.3 17.9 44.8 30.0 100.0 1998 6.8 24.4 49.6 27.0 100.0 1999 7.6 19.2 52.0 24.9 100.0 2000 6.9 16.5 53.0 31.1 100.0 2001 7.3 14.0 55.3 36.8 100.0 2002 7.5 12.5 59.9 44.4 100.0 2003 6.6 19.0 59.7 45.5 100.0 2004 6.0 18.4 60.6 49.7 100.0 2005 6.5 17.5 64.0 45.9 100.0 Average 7.2 17.8 52.3 35.3 100.0 Source: CBS, National Accounts The country’s basket of manufactured exports closely mirrors the key manufactured products, namely processed fish, food and beverages and processed meat, respectively (Figure 5.6). Its export basket diversified slightly between 1995 and 2005, as indicated by the increase of “other manufacturing� from 28 percent in 1995 to 46 percent in 2005; and it is encouraging to note that refined zinc grew from zero in 2002 to 12.5 percent of manufactured exports in 2005. 106 Figure 0.6: Composition of Manufactured Exports (percent), 1995 4.5 11.2 20.7 8.5 55.1 Meat and Meat Preparations Prepared Fish Beverages and Food Copper Other Manufactured products Source:CBS, National Accounts 5.62 As measured by a Herfindahl index for manufactured exports, Namibia’s degree of diversification in its manufacturing sector is comparable to that in Lesotho. In Africa, only Angola, Botswana, Comoros, Ethiopia, Seychelles, Sudan and Swaziland have a less diversified manufacturing base (Table 5.7). Table 5.7: Herfindahl Iindex of Export Concentration for Manufactured Exports from Selected African Countries Country Herfindahl Date Country Herfindahl Date index index Namibia 0.31 2005 Malawi 0.12 2006 Angola 0.76 1991 Mauritius 0.20 2006 Botswana 0.81 2003 Mozambique 0.07 2005 Burundi 0.11 2005 Rwanda 0.10 2003 Comoros 0.49 2000 Seychelles 0.33 2005 Djibouti 0.08 1991 South Africa 0.04 2006 Egypt 0.05 2004 Sudan 0.39 2005 Eritrea 0.10 2003 Swaziland 0.41 2002 Ethiopia 0.46 2003 Tanzania 0.05 2006 Kenya 0.03 2004 Uganda 0.11 2006 Lesotho 0.31 2002 Zambia 0.09 2005 Madagascar 0.22 2004 Zimbabwe 0.10 2004 5.63 Exports of textiles and apparel to the US have increased significantly in recent years, from US$6.7 million in 2002 to US$41.9 million in 2003 and US$78.8 million in 2004, representing one-third of total exports to the US (Bank of Namibia, 2006c). Most of these exports qualified under AGOA and account for 6,000 jobs. Large investments 107 have been made by the Asian-owned Ramatex company (US$200 million). However, most of the skilled personnel at Ramatex are Asian, and Namibian employees are not adequately trained to fill these roles if Asian investors were to leave. Following the end of the WTO Agreement on Textiles and Clothing (ATC) on 31 December 2005, with consequent increased competition from producers in Asia, clothing factories in Namibia have started to relocate abroad while others are relying on government support to maintain their operations. The Rhino Garments Factory, a subsidiary of Ramatex, closed in 2005 with the loss of 1,600 jobs. Also in 2005, the Government rescued Tropitex, a uniform manufacturer, by converting N$3.5 million of debt into equity and moving it to a military-owned company. And more recently the Government and trade unions have been engaged in negotiations with Ramatex, which has considered withdrawing all of its operations from Namibia, citing bad publicity and a lack of productivity at its Windhoek factory. Efforts aimed at increasing manufacturing output 5.64 The Export Processing Zone program has not been a success – as has been stressed in Chapter 3 –with only 21 firms in operating as EPZs so far, after a period of 10 years (it started in 1996).70 Companies granted EPZ status can set up their operations anywhere in the country. There are also specially developed industrial parks at Walvis Bay, Oshikango and Katima Mulilo. The benefits are generous, including zero corporate tax, zero import duties on imported capital equipment and raw materials; zero VAT, stamp or transfer duties. 5.65 Manufacturing incentives are generous, as has been noted in Chapter 3: tax at 18 percent for 10 years, after which it reverts to 35 percent; zero VAT on purchases of machinery and equipment; factory building written off at 20 percent in the first year and the balance at 8 percent per year, and so on. Some 104 companies have benefited between 1993 and 2004 which represent 27 percent of Namibia’s of 384 manufacturing establishments. 5.66 As has been emphasized in Chapter 3, these benefits have not attracted increasing flows of foreign investment and they err on the side of generosity. Meanwhile, Namibia’s corporate tax of 35 percent is rather higher than that of its competitors71. It would be better to strip away all the special benefits for manufacturing and for EPZs, in favor of (a) a lower corporate tax rate for all firms, (b) serious efforts to remove the real constraints, which are the anti-export bias in SACU’s external tariffs, the business climate, and labor quality, as will be discussed below. Constraints to the growth of the manufacturing sector72 5.67 The enterprise survey of the Investment Climate Assessment found four key problems: crime, corruption, difficulty of access to finance and macroeconomic 70 80 are thus registered but most are inactive. 71 For example in Botswana, the Government charges a flat tax rate for manufacturers of 15 percent compared to Namibia’s tax rate of 18 percent for 10 years and 35 percent thereafter. 72 The analysis in this section also draws on the Investment Climate Assessment conducted for Namibia in 2006. 108 instability. These items were cited both by microenterprises and by small, medium and large (SMLE) firms. 5.68 The point about access to finance resonates with the analysis done in Chapter 4 on the access to finance as a constraint for the small and micro enterprises. It is striking, however, that managers of few firms of either type were concerned about any area of either infrastructure or regulation (other than business licensing for microenterprises). One might have expected the relatively high cost of electricity73 to appear in their list of barriers to investment, but it did not figure importantly. Figure 0.7: Perceptions of Large and Small Enterprises About Barriers to Investment74 60% % of firms saying issue is serious problem 40% 20% 0% ty ke tes pe y e rts Ta ime Fi n n y n nd ns ns lls ss ors s lit ns g nc lit io io ci La Reg tio on n ou ki Co abi La o a io t ri pt bi at na si r t it rta r R lati R rs C i at ta at ec C ru m istr en st to x ul ad spo c u or El rm o In Po Lic m in sin uni eg lI C or dm an ce ca m W r s ac es Tr e Ac A liti al bo M co x Ta Tr le Bu fo Te In 5.69 Besides these four areas, managers of firms cited tax rates and poor worker skills. Very few SMLEs—about 1 in 10 or even fewer—rated any other area of the investment climate as a serious obstacle. In particular, fewer than 1 in 10 SMLEs rated any aspect of either regulation or infrastructure as a serious concern. In addition, microenterprise managers tended to stress business licensing, competition from informal operators, and access to land as serious problems. 73 Based on a survey of manufacturing enterprises conducted by the BON in 2006. Energy costs in Namibia were particularly cited to be much higher vis-à-vis energy costs in South Africa. According to a study conducted by Emcon Consulting Group for the Namibia Manufacturers Association in 2004, the average cost per kilowatt hour in Namibia is between 57 percent and 6 percent higher than in RSA (20 to 30 c/kWh average). 74 Source: Investment Climate Assessment, 2007. The left-hand (light-colored) column represents large enterprises, and the right-hand (darker-colored) column is small enterprises. 109 5.70 A second set of constraints to growth arise from Namibia’s trade regime. As has been explained in Chapter 3, the biggest problems are that (a) the high common external tariff, historically set to promote South African industry, has been detrimental to Namibia’s competitiveness; and (b) there are barriers to intra-SACU trade as. Hence the challenge for Namibia will be to seek to review and revise with SACU the external tariff structure to enhance the competitiveness of Namibian industry and to strengthen the Competition Commission to address issues related to the discretionary use of regulations and product standards to stifle intra-SACU trade. 5.71 The Government has attempted to respond to the anti-export bias in various ways. The Industrial Policy of 1992 lays out plans to develop the country’s key resources for value addition, aiming at promoting exports and efficient import substitution, and employment generation, particularly for disadvantaged groups. The Special Industrialization Program (SIP) developed by the Ministry of Trade and Industry has identified the following economic activities as having key potential for industrialization: food processing; leather; textiles and apparel; wood; cement; cutting and polishing of semi-precious stones; paper products; electronic appliances; motor vehicle components and mineral beneficiation. 5.72 It may be tempting to try to strategically use the SACU provision for infant industry protection to pursue the Special Industrialization Program. However, the SACU tariff set-up is so badly distorted that tinkering with infant industry protection would not succeed in establishing a “level playing field� for Namibian industry. Other countries which have tried to “back winners� in the race for industrialization have rarely backed the right horse. Japan is a case in point. Its highly successful industrial growth between 1950 and 1980 was achieved in spite of, rather than because of, the incentives provided by the government. There turned out to be no relation between the amount of money provided in the earlier years and the level of subsequent growth. This should not be a surprise. It is difficult enough for private sector specialists to figure out which branches of industry are likely to deliver the highest profit rates; it is far more difficult for the government, which is not driven by the profit motive, and cannot become a specialist in all sub-sectors, to do so. It would be better for Government to focus on renegotiating with SACU, addressing barriers such as crime, corruption, high tax rates, poor worker skills. 5.73 The Government should further strengthen institutional capacity to promote and conduct research on the country’s manufacturing sector. The national census on manufacturing establishments should be executed every 5 years, as the statistics help with industrial planning and policy formulation. 5.74 As noted above, the shortage of skilled labor is a serious constraint to economic growth. The Ministry of Education in collaboration with the Ministry of Labor and Social Welfare, as well as the National Planning Commission should formulate and implement policies to fill the demand for qualified and skilled artisans, technicians, engineers, researchers and business managers. Implementing the Education and Training Sector Improvement Program (ETSIP) will help achieve this. 110 APPENDICES 111 APPENDIX 1: NAMIBIA GDP BY SECTOR (CONSTANT 1995 PRICES – N$ MILLIONS) Industry 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Agriculture and forestry 872 1,005 926 909 1,009 1,056 899 975 1,010 1,019 1,130 1,173 1,211 Commercial 517 602 519 489 495 648 589 723 755 681 738 743 791 Subsistence 355 403 407 420 514 408 310 252 255 338 391 430 420 Fishing and fish processing on board 491 482 465 567 559 641 631 703 732 666 643 612 513 Mining and quarrying 1,058 1,100 1,145 1,117 1,210 1,190 1,117 1,296 1,237 1,688 1,665 1,910 1,914 Diamond mining 763 783 782 793 908 847 803 942 909 1,260 1,217 1,524 1,512 Other mining and quarrying 295 317 363 324 303 343 314 355 328 428 448 386 401 Primary industries 2,421 2,588 2,537 2,593 2,779 2,887 2,647 2,974 2,979 3,372 3,438 3,695 3,637 Manufacturing 1,461 1,225 1,445 1,574 1,515 1,570 1,657 1,816 1,911 1,968 1,989 1,813 2,050 Meat processing 123 128 92 99 111 101 107 109 97 88 95 87 88 Fish processing on shore 390 139 262 356 281 241 204 183 277 269 256 160 182 Manufacture of other food products 539 586 654 725 759 774 808 875 872 885 929 980 1,040 Other manufacturing 409 372 438 394 364 455 538 648 665 726 709 586 739 Electricity and water 260 238 214 223 268 299 228 230 266 278 315 297 243 Construction 360 416 367 423 364 344 527 459 564 570 583 750 996 Secondary industries 2,081 1,879 2,026 2,220 2,148 2,214 2,412 2,505 2,741 2,817 2,887 2860 3,288 Wholesale and retail trade, repairs 1,077 1,179 1,248 1,336 1,380 1,455 1,496 1,607 1,674 1,801 1,915 2103 2,229 Hotels and restaurants 217 200 254 285 251 269 292 316 332 321 322 332 345 Transport and communication 851 894 962 862 968 1,049 1,196 1,332 1,372 1,536 1,811 1,992 2,141 Transport and storage 635 655 673 533 631 671 725 837 753 816 863 1,012 1,037 Post and telecommunications 216 239 289 329 337 379 471 494 619 720 948 980 1,104 Financial intermediation 325 380 423 450 461 489 498 514 564 646 768 780 799 Real estate and business services 1,230 1,285 1,243 1,272 1,319 1,338 1,393 1,494 1,572 1,683 1,728 1,804 1,882 Owner-occupied dwellings 606 628 644 660 677 694 711 740 759 778 816 861 909 Other real estate and business services 624 657 599 612 642 645 682 754 813 906 912 943 973 Community, social and personal 114 120 122 122 122 133 133 137 144 135 140 168 172 services Producers of government services 2,780 2,876 2,980 3,060 3,162 3,236 3,281 3,408 3,475 3,663 3,811 3,799 3,779 Other producers 264 270 275 281 286 292 298 307 310 318 324 330 336 Tertiary industries 6,857 7,204 7,507 7,668 7,950 8,262 8,586 9,114 9,444 10,104 10,820 11,308 11,683 Less financial intermediation services 109 125 137 144 152 151 158 155 178 206 233 272 307 All industries 11,251 11,546 11,932 12,336 12,724 13,211 13,488 14,439 14,986 16,087 16,911 17,591 18,301 Taxes less subsidies on products 1,455 1,566 1,733 1,779 1,866 1,889 1,974 2,055 2,083 2,106 2,140 2,211 2,223 GDP at market prices 12,706 13,112 13,665 14,115 14,591 15,100 15,462 16,494 17,069 18,193 19,051 19,802 20,524 Source: Central Bureau of Statistics (2006). 112 APPENDIX 2: NAMIBIA GDP BY SECTOR (CURRENT PRICES – PERCENTAGE CONTRIBUTIONS) Industry 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Agriculture and forestry 6.9 6.5 5.8 4.8 5.3 5.5 4.1 5.1 5.4 5.1 6.0 6.2 6.4 Commercial 4.1 3.9 3.2 2.4 2.6 3.3 2.6 4.0 4.0 3.5 4.2 4.1 4.4 Subsistence 2.8 2.6 2.6 2.4 2.7 2.1 1.5 1.1 1.4 1.6 1.8 2.1 2.0 Fishing and fish processing on board 3.9 4.2 3.9 5.0 4.7 4.4 5.2 4.9 5.2 4.2 4.8 4.1 4.2 Mining and quarrying 8.3 10.3 10.3 9.8 9.4 11.0 13.2 13.9 8.8 9.6 8.5 13.0 12.4 Diamond mining 6.0 7.8 7.5 7.2 8.2 8.2 10.3 10.4 7.8 8.4 7.0 8.7 5.9 Other mining and quarrying 2.3 2.5 2.9 2.5 1.2 2.9 2.9 3.5 1.0 1.2 1.5 4.3 6.5 Primary industries 19.1 20.9 20.0 19.6 19.4 20.9 22.6 23.9 19.3 18.9 19.4 23.3 23.0 Manufacturing 11.5 8.9 9.9 10.9 10.0 10.0 9.4 10.0 11.4 11.0 10.2 11.5 14.3 Meat processing 1.0 1.0 0.7 0.7 0.7 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 Fish processing on shore 3.1 1.0 1.7 2.9 2.2 2.3 1.8 2.1 2.6 2.1 1.2 1.4 1.5 Manufacture of other food products 4.2 4.3 4.6 4.9 4.9 4.6 4.4 4.6 4.9 4.6 4.5 4.2 4.4 Other manufacturing 3.2 2.6 2.9 2.4 2.3 2.6 2.7 2.9 3.6 3.9 4.3 5.7 8.2 Electricity and water 2.0 2.1 2.1 2.4 2.6 2.6 2.2 2.6 3.0 3.3 3.4 2.7 2.7 Construction 2.8 3.0 2.6 2.8 2.3 2.0 2.8 2.2 3.0 3.0 3.1 3.6 3.4 Secondary industries 16.4 14.0 14.6 16.1 15.0 14.6 14.5 14.8 17.4 17.3 16.7 17.8 20.4 Wholesale and retail trade, repairs 8.5 8.7 9.0 9.2 9.0 11.3 10.8 10.4 11.8 10.9 10.7 11.1 9.9 Hotels and restaurants 1.7 1.5 1.8 1.9 1.7 1.7 1.7 1.7 1.9 1.8 1.7 1.5 1.5 Transport and communication 6.7 6.5 6.5 5.9 5.9 5.8 5.5 6.3 7.0 7.3 7.6 5.7 5.9 Transport and storage 5.0 4.7 4.5 3.7 3.8 3.7 3.5 3.9 4.2 4.1 4.1 3.3 3.8 Post and telecommunications 1.7 1.8 1.9 2.2 2.1 2.1 2.0 2.4 2.9 3.2 3.5 2.4 2.1 Financial intermediation 2.6 3.2 3.6 3.4 3.6 3.5 3.5 3.3 3.7 3.3 3.7 3.3 3.5 Real estate and business services 9.7 10.2 9.7 9.6 9.8 9.4 9.0 8.6 9.3 9.7 9.5 8.7 8.4 Owner-occupied dwellings 4.8 5.1 5.1 5.1 5.2 5.0 4.8 4.4 4.7 4.8 4.7 4.3 4.2 Other real estate and business 4.9 5.1 4.6 4.5 4.6 4.4 4.3 4.2 4.6 4.9 4.8 4.4 4.2 services Community, social and personal 0.9 0.9 0.9 0.8 0.8 0.8 0.8 0.7 0.8 0.8 0.8 0.9 0.9 services Producers of government services 21.9 22.7 22.4 22.0 22.3 21.4 21.0 19.9 20.3 19.5 19.5 17.8 16.9 Other producers 2.1 2.0 1.9 1.9 1.9 1.8 1.8 1.7 1.8 1.8 1.7 1.5 1.5 Tertiary industries 54.0 55.5 55.9 54.7 55.0 55.9 54.1 52.8 56.6 55.1 55.0 50.6 48.5 Less financial intermediation services 0.9 1.1 1.2 1.2 1.3 1.2 1.2 1.1 1.3 1.1 1.1 1.2 1.4 All industries 88.5 89.3 89.3 89.2 88.1 90.2 90.0 90.4 92.2 90.2 90.0 90.6 90.5 Taxes less subsidies on products 11.5 10.7 10.7 10.8 11.9 9.8 10.0 9.6 7.8 9.8 10.0 9.4 9.5 GDP at market prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source:Adapted from Central Bureau of Statistics (2006). 113 APPENDIX 3: NAMIBIA EXPORTS OF GOODS AND SERVICES CONSTANT 1995 PRICES – N$ MILLION (% OF TOTAL EXPORTS OF GOODS AND SERVICES) Product 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average (1995- 2005) Live animals, 450 541 276 373 351 235 297 487 486 483 531 595 615 410 animal products (7.2) (8.4) (4.4) (6.0) (5.4) (3.6) (4.7) (6.7) (5.5) (5.7) (6.1) (6.4) (6.0) (5.8) and crops 434 527 263 359 336 215 273 366 336 293 359 307 290 342 Live animals (6.9) (8.2) (4.2) (5.8) (5.2) (3.3) (4.3) (5.1) (3.8) (3.4) (4.1) (3.3) (2.8) (4.8) 16 13 13 14 15 20 24 23 23 28 20 29 29 19 Animal products (0.3) (0.2) (0.2) (0.2) (0.2) (0.3) (0.4) (0.3) (0.3) (0.3) (0.2) (0.3) (0.3) (0.3) 37 39 21 37 97 126 162 152 189 239 84 Crops (0.6) (0.6) (0.3) (0.6) (1.3) (1.4) (1.9) (1.7) (2.0) (2.3) (1.2) Fish and fishing 15 13 11 12 13 15 9 11 99 90 156 189 170 40 products (0.2) (0.2) (0.2) (0.2) (0.2) (0.2) (0.1) (0.2) (1.1) (1.1) (1.8) (2.0) (1.6) (0.6) Ores and 2,404 2,492 2,500 2,117 2,655 2,819 2,350 2,683 2,430 3,262 3,071 3799 4,099 2,617 minerals (38.2) (38.6) (39.8) (33.9) (40.7) (43.6) (37.1) (37.2) (27.4) (38.3) (35.3) (40.7) (39.7) (36.9) 601 650 709 650 657 700 676 664 742 795 778 842 1,560 693 Metal ores (9.6) (10.1) (11.3) (10.4) (10.1) (10.8) (10.7) (9.2) (8.4) (9.3) (8.9) (9.0) (15.1) (9.8) 40 24 20 28 51 89 77 40 46 39 53 53 46 46 Other minerals (0.6) (0.4) (0.3) (0.4) (0.8) (1.4) (1.2) (0.6) (0.5) (0.5) (0.6) (0.6) (0.4) (0.6) 1,763 1,818 1,770 1,440 1,948 2,030 1,597 1,979 1,641 2,429 2,241 2903 2,257 1,878 Diamonds (28.0) (28.1) (28.2) (23.1) (29.9) (31.4) (25.2) (27.4) (18.5) (28.5) (25.7) (31.1) (21.9) (26.5) 4 1 0 1 2 1 2 1 2 1 1 1 1 2 Electricity (0.1) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Manufactured 2,240 2,054 1,995 2,258 1,993 2,271 2,476 2,608 2,893 3,201 3,172 2940 3,233 2,469 products (35.6) (31.8) (31.7) (36.2) (30.6) (35.1) (39.1) (36.1) (32.6) (37.6) (36.4) (31.5) (31.3) (34.9) Meat, meat 464 547 360 407 433 391 472 274 340 382 448 404 390 411 preparations and (7.4) (8.5) (5.7) (6.5) (6.6) (6.0) (7.5) (3.8) (3.8) (4.5) (5.1) (4.3) (3.8) (5.8) hides Prepared and 1,235 957 1,070 1,321 1,218 1,297 1,216 1,183 1,409 1,297 1,171 921 915 1,216 preserved fish (19.6) (14.8) (17.0) (21.2) (18.7) (20.1) (19.2) (16.4) (15.9) (15.2) (13.4) (9.9) (8.9) (17.2) Beverages; other 191 303 274 329 227 384 460 583 607 402 421 410 486 380 food products (3.0) (4.7) (4.4) (5.3) (3.5) (5.9) (7.3) (8.1) (6.8) (4.7) (4.8) (4.4) (4.7) (5.4) 250 155 195 71 46 162 243 196 218 175 192 224 171 Copper (4.0) (2.4) (3.1) (1.1) (0.7) (2.6) (3.4) (2.2) (2.6) (2.0) (2.1) (2.2) (2.4) 21 276 395 332 496 231 Refined zinc (0.2) (3.2) (4.5) (3.6) (4.8) (3.3) Other 100 93 95 130 115 155 166 326 321 627 560 681 724 244 manufactures (1.6) (1.4) (1.5) (2.1) (1.8) (2.4) (2.6) (4.5) (3.6) (7.4) (6.4) (7.3) (7.0) (3.4) Total exports of 5,112 5,101 4,781 4,798 5,053 5,363 5,171 5,823 7,448 7,037 7,464 7,524 8,316 5,741 goods, f.o.b. (81.3) (79.0) (76.0) (76.9) (77.5) (83.0) (81.7) (80.7) (83.9) (82.7) (85.7) (80.5) (80.6) (81.1) 104 142 149 122 128 89 87 90 80 124 108 573 573 111 Services (1.7) (2.2) (2.4) (2.0) (2.0) (1.4) (1.4) (1.2) (0.9) (1.5) (1.2) (6.1) (5.6) (1.6) Purchase in 1,072 1,218 1,357 1,323 1,340 1,014 1,073 1,303 1,350 1,353 1,139 1,247 1,351 1,231 Namibia by non- (17.0) (18.9) (21.6) (21.2) (20.6) (15.7) (16.9) (18.1) (15.2) (15.9) (13.1) (13.3) (13.1) (17.4) residents Total exports of 1,176 1,361 1,506 1,445 1,467 1,103 1,160 1,393 1,430 1,476 1,247 1,820 1,983 1,342 services (18.7) (21.1) (24.0) (23.1) (22.5) (17.1) (18.3) (19.3) (16.1) (17.3) (14.3) (19.5) (19.2) (18.9) Total exports of 6,288 6,461 6,287 6,243 6,520 6,465 6,331 7,216 8,878 8,514 8,710 9,344 10,319 7,083 goods and (100) (100) (100) (100) (100) (100) (100) (100) (100) (100) (100) (100) (100) (100) services Annual changes 9.5 2.8 -2.7 -0.7 4.4 -0.8 -2.1 14.0 23.0 -4.1 2.3 7.3 10.4 4.1 (%) Source: Adapted from Central Bureau of Statistics (2006). 114 APPENDIX 4: NAMIBIA’S AGRICULTURAL PRODUCTION AND EXPORTS (SELECTED COMMODITIES) 1997-2006, 1000S TONS (% EXPORTED) Crop 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Crops Millet 120 44 48 77 65 56 60 74 48 49 (0%) (0%) (0%) (0%) (0%) (0%) (0%) (0%) Maize 49 18 19 32 28 28 33 28 41 61 (5%) (31%) (17%) (8%) (12%) (13%) (23%) (8%) Grapes 3.3 3.9 5.2 3.8 6.0 8.0 8.5 8.9 9.5 9.5 (100%) (100%) (45%) (100%) (98%) (100%) (100%) (100%) Wheat 5.7 5.3 3.6 3.4 6.1 10.5 8.0 8.2 11.0 12.9 (100%) (100%) (40%) (42%) (20%) (100%) (100%) (6%) Sorghum 9.5 2.5 3.9 9.0 8.1 5.6 6.0 6.0 5.8 6.0 (0%) (2%) (1%) (0%) (0%) (1%) (1%) (0%) Tomatoes 3 4 4 4 4 4 4 0.8 0.9 0.7 (47%) (100%) (93%) (100%) (27%) (14%) (29%) (100%) Seed cotton 1.3 2.1 3.3 3.4 3.4 3.8 3.4 5.1 5.1 5.1 (0%) (5%) (0%) (0%) (0%) (0%) (1%) (1%) Watermelons 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 (32%) (91%) (12%) (16%) (14%) (36%) (18%) (18%) Groundnuts 0.3 0.2 0.2 0.3 0.3 0.2 0.2 0.1 0.0 0.0 (17%) (35%) (25%) (0%) (30%) (40%) (5%) (35%) Meat Beef 29.8 38.3 44.6 63.8 57.8 60.9 78.4 42.9 38.6 36.2 (100%) (100%) (70%) (49%) (47%) (39%) (65%) (11%) Sheep & 9.4 5.8 8.1 9.7 12.2 17.5 19.1 6.6 6.7 11.9 goat (3%) (20%) (24%) (19%) (54%) (36%) (24%) (1%) Source: FAO (2007a). 115 REFERENCES Aghion, P. and P. 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