Zambia is experiencing mall mania, with millions of dollars in foreign capital pouring into retail property developments. What might this hyperconsumerism mean for the country’s long term development trajectory? Muna Ngenda discusses how unfiltered inflows of foreign investment can underdevelop emerging economies.
Zambia is a relatively small developing country (population of 16 million and GDP of $21 billion) in constant search?- like many others?- of foreign direct investment to boost its economy. Zambia, like most African governments, relies on a steady stream of investment roadshows, enormous tax incentives and heavy presidential involvement in multinational business affairs to attract foreign investment. This has produced some success, if measured purely numerically, in terms of the size of total FDI inflows in a given year. However, evidence has shown that this simple numeric evaluation criteria is inadequate, and that developing countries must pay attention to what type of investment they are attracting in order to actively manage their development trajectories.
Zambia provides a pertinent case in point, given the current boom in commercial property development for international retail. Shopping malls have blossomed around the country in the last decade, with construction picking up pace in the last two years. The capital, Lusaka, now boasts no less than seven major retail locations?— four within three miles of each other, and another three occupying the same road intersection. At least four more major developments are in progress in the city – one generating controversy for converting secondary school grounds to retail?use – and the trend extends to the Copperbelt and smaller regional hubs. Hundreds of millions of dollars, mainly from South African property developers and international investment funds, are pouring into the country. Despite the anticipated hundreds of retail jobs this pattern could afford, Zambia’s mall mania poses two serious problems for the country’s development.
The first is the import-heavy nature of retail. Zambian malls are anchored by large South African retailers stocking mainly South African products, and disproportionately populated by international fast food chains and boutique importers of luxury and consumer goods. Indigenous store occupancy and local product shelf space do exist, but are rare phenomena. This creates a persistent drag on the country’s balance of payments, foreign reserves and local investment (rather than externalisation) of profits. One-off inflows to this sector therefore create perpetual outflows from the local economy.
The second problem arising from retail-heavy investment is the relative neglect of manufacturing investment. Expansion of productive capability and increasing complexity of exports is critical to long term growth and increasing incomes. Focusing finance on retail properties does not serve this purpose, and limits long-term development prospects by crowding out more transformative uses of scarce capital. The financial sector in Zambia is unsuited to industrial and corporate expansion given prevailing commercial interest rates far above 30 per cent, and local capital markets are extremely small and static ?- the Lusaka Stock exchange has daily trades of around US$2,000, and a market capitalisation of US$60 million (London’s is US$16 billion, New York’s is US$19 trillion). This leaves three major sources of credit for large scale local production: local development banks, national pension funds, and international finance.
National development banks are?in Zambia’s case underfunded (total replenishments of US$20–30 million), with high collateral requirements and small (primarily <US$1m) loan denominations, historically lending more to construction than manufacturing (31 per cent vs 17 per cent of DBZ portfolio as of 2014).
Local institutional investors such as pensions funds represent the largest aggregation investment funds, but also prefer lucrative property developments to transformational expansion of productive capability: NAPSA, the state pension authority does hold some minority shares in local cement and steel interests, but tends to invest in office parks, residential developments and retail properties. As shown above, international finance is currently too focused on retail prospects to pay sufficient attention to investment in local production of goods.
The reason both local and foreign capital is so focused on property development is that it offers a relatively stable and lucrative return to institutional investors and hedge funds alike. In the abstract there may be nothing wrong with that, simply capital responding rationally to market information. Economic development, however, is a concrete rather than abstract pursuit, a particularly crucial one with which citizens of low-income countries have entrusted their governments.
It is therefore necessary that the incumbents to take a more active role in managing the type and not simply the amount of capital inflows to their economies, delineating priority sectors and capping duplicative, myopic investments and externalisation of profits.
African governments cannot simply roll out a litany of (often inconsequential, sometimes economically harmful) incentives and hope for market mechanisms to do the rest.
Thanks to short-termism, speculative tendencies, and the desire for ever higher returns to international investment, what transnational capital markets want and what developing countries need are not always the same thing. Active management of capital flows can provide the developmental thrust from FDI that the current wholesale approach lacks, and prevent the perverse outcomes that pure market mechanisms are prone to perpetuate. In Zambia’s case, there is already a glut of local investment in property development; foreign direct investment must now be redirected to more productive uses.
Muna Ngenda (@mngenda) is an MSc candidate in African Development at LSE, a 2016-17 Chevening Scholar, and an alumnus of the LSE Programme for African Leadership. His primary interests are the political economy of development in Africa, and the role of regional integration and trade policy in industrialisation.