Straightening a skewed economy.

Straightening a skewed economy

The post-independence Namibian Government has inherited an economy of sharp contrasts. From some viewpoints, Namibia can be seen as a prosperous middle-income country. Per capita income is about $1,200 annually--one of the highest in sub-Saharan Africa. The country's physical infrastructure is among the best in the region; its telecommunications system, one of the most efficient; its public administration, highly developed.

At the same time, Namibia has a severely skewed income-distribution pattern. A tiny minority enjoys incomes and health and education services at levels comparable to those in Western Europe, while the vast majority lives in conditions barely above subsistence, with highly inadequate public services.

Although per capita gross domestic product (GDP) in 1988 was about $1,200, the white population--5 per cent of the total population--had an estimated per capita GDP of $16,500. The figure for non-whites within the modern economic activities--about 40 per cent of total--was estimated at $750. As for the rest--a non-white population dependent upon agriculture and informal work activity--it was estimated at $85.

In addition to this, the Government has inherited a stagnating economy, with its unemployment rate estimated at 30 per cent.

Three main challenges

The Namibian Government faces three main economic challenges: reactivate the economy, reduce income disparities, and restrain and redirect public expenditures.

For the past 20 years, the Namibian economy has performed in a lacklustre way. After expanding rapidly at 9 per cent per year during the 1960s, the economy's growth rate fell to zero during the 1970s.

Owing to continued population growth, per capita GDP declined without interruption during the past decade. At independence, it was 23 per cent lower than in 1980.

The second challenge facing the Government is closely related to the first. The extreme disparities in income distribution and the provision of social services are in good part, if not solely, the results of apartheid. With independence, apartheid policies disappeared. The heretofore disenfranchised and neglected majority will rightfully expect to partake in greater inreasure of the country's income and wealth.

Addressing the country's equity problem at an acceptable pace without jeopardizing growth is a closely-related matter. The equity issue should be resolved while avoiding the type of too-quick and too-expensive solutions that in many other developing countries have led to high inflation and low (or even negative) growth.

As for the third challenge, the Government faces a major fiscal problem. It has inherited an oversized public administration and an undesirable compsotion of public expenditures, some of which are of questionable efficiency. The Government needs to change the composition of expenditures, increase their efficiency and contain their growth, a difficult task that requires time and deft economic management.

Reducing expenditures while attempting to provide more and better health, education and housing services to the majority of the population will be a difficult management problem; in the short run, expenditures are likely to rise.

Over the next few years, redirection of social Government expenditures towards the poorer part of the population is needed, which up to now has been concentrated mainly in the northern areas, near the border with Angola.

It will be necessary also to increase maintenance expenditures and public investment, with emphasis on the northern region and on the needs associated with possible migration of part of the poor northern population to the more developed southern areas.

Policies to stimulate the development of strong, small and medium scale enterprises might also be appropriate, with the twin objectives of fostering development of indigenous entrepreneurship and reinforcing the drive for employment creation in the modern sector.

External aid a must

Increasing tax rates, while feasible, might not be advisable, as the tax burden is already at developed-country levels; it is important to maintain an attractive economic environment for the private sector. There is room for broadening the tax base and reducing overly generous exemptions, but these changes would require further analytical work; the scope for change in the short run appears limited. The fiscal deficit, therefore, is likely to increase in the immediate future.

In the medium term, increases in tax revenues are likely to arise from economic growth. There should also be scope for revenue increases from broadening of the tax base.

An adequate level of external financing for social expenditures on health, education and housing--preferably on concessional terms--would forestall such an outcome and give the Government a breathing space to examine these issues, devise solutions and put in place an expenditure reduction and rationalization programme that does not jeopardize either growth or equity.

Fishing and mining

The private sector's willingness to invest will be affected by two closely related factors: business confidence and the investment climate. The Government's approach to economic management is conducive to private sector growth, and prospects for a speedy reactivation of the economy are good.

Mining and fishing would constitute the two main sources of growth during the next two years. With the lifting of sanctions, exports of mining products, especially uranium, are expected to grow at the rate of 9.7 per cent in 1990, 3.2 per cent in 1991 and 2.5 per cent in 1992.

Fishing, so far a minor activity, is likely to become one of the most important economic activities. The Namibian Sea is one of the largest and most productive coastal fishing grounds in the world. But owing to the country's uncertain political status before independence, there was no internationally recognized coastal State management authority. Fishing took place almost freely, with few benefits accruing to the country.

Soon after independence, the Government proclaimed a 200-mile exclusive economic zone and prohibited all fishing. It is estimated that with proper management, after stocks are given a chance to recover, the Benguela current could yield a sustainable annual catch of 3 million metric tons, equivalent to $3 billion, approximately half of which would be in Namibian waters.

The impact of the fishery sector on Namibia's income will depend on the extent to which catch translates into foreign exchange earnings for Namibian residents. At worst, Namibia would receive income from fishing licenses only; at best, it could capture the entire catch proceeds. Foreign exchange earnings from commercial fishing licenses and from Namibia's own fishing fleets are estimated at $200 million in 1990.

Finally, agriculture also has the potential to become a source of growth in the medium term, if appropriate investments in irrigation are undertaken. The Government is aiming at reducing the productivity gap between communal and commercial farming through the provision of research and extension services to communal farmers. Agriculture is expected to grow at around 3 to 4 per cent per year during 1991-1992.

After two decades of economic stagnation, the lifting of sanctions and the newly internalized income from fishing activities are likely to give the Namibian economy a boost that may bring GDP growth up to 6.4 per cent in 1990. The boost is likely to spill over into 1991, after which growth is likely to slow down and may approach the rate of population growth.

By the mid 1990s, growth might also stem from the establishment and eventual production of fish-processing industrial activities and higher productivity of communal farming.

Namibia's development

strategy

The recent General Policy Statement of the namibian Government states that the welfare of the people would be promoted through policies that:

* ensure that every citizen has access to public facilities and services;

* raise and maintain the level of nutrition and public health, and the standard of living;

* guarantee equality of opportunity for women; and

* protect and maintain the ecosystems and living natural resources.

In accordance with these policies, the main thrust of the Government's expenditure programme for fiscal 1990/1991 is to provide better health, education, housing and potable water to the majority of the population; improve research and extension services; and undertake small-scale irrigation schemes to stimulate agricultural growth.

At the same time, the Government intends to increase the efficiency of public services and to make them more broadly available, while stepping up maintenance and investment expenditures to protect and extend the country's existing infrastructure.