MODELLING THE LESOTHO ECONOMY: A SOCIAL ACCOUNTING MATRIX APPROACH 1

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1 Interntionl Journl of Food nd Agriculturl Economics ISSN Vol 1 No1 pp MODELLING THE LESOTHO ECONOMY: A SOCIAL ACCOUNTING MATRIX APPROACH 1 Yons Tesfmrim Bht University of the Free Stte, Deprtment of Agriculturl Economics Bloemfontein 9300, South Afric, E-mil: Yons204@yhoocom Abstrct Using 2000 Socil Accounting Mtrix (SAM) for Lesotho, this pper investigtes the key fetures of the Lesotho economy nd the role plyed by the griculturl sector A novel feture of the SAM is the elborte disggregtion of the griculturl sector into finer subctegories The fundmentl importnce of griculture development emerges clerly from descriptive review nd from SAM multiplier nlysis It is dominnt with respect to income genertion nd vlue of production It contributes 23 percent of gross domestic product nd 12 percent of the totl vlue of production It employs 26 percent of lbour nd 24 percent of cpitl The construction sector hs the highest open SAM output multiplier (1,588) nd SAM output multiplier (1767) The household multipliers indicte tht in the rurl nd urbn res, griculture nd mining respectively generte most household income Agriculture hs the highest employment coefficient Agriculture nd mining sectors lso hve the lrgest employment multipliers in Lesotho Key Words: SAM, Lesotho economy, Agriculturl sector, Multiplier nlysis 1 Introduction Lesotho is smll Southern Africn country covering bout squre kilometers, completely lndlocked nd uniquely surrounded by only one country, nmely the Republic of South Afric According to government sources, the country s popultion ws pproximtely 22 million in 2000, including bout migrnts working mostly in the South Africn mining industry (UNDP, 2000) Lesotho is poor country in the sense tht more thn hlf of the popultion lives below the poverty line Bsed on n bsolute poverty line equivlent to the interntionl threshold of 2200 kilogrm clories needed for helthy nd ctive life, Chndr et l (2002) reported tht pproximtely 58 per cent of the popultion could be clssified s poor in 1986 This proportion ws virtully unchnged in 1994 (Ngnou, 2004) According to Vn Schlkwyk nd Jooste (2002), Lesotho imports up to 95 per cent of its domestic food requirements This indictes tht domestic griculturl production hs not been sufficient to contribute meningfully to food security The potentil for development in the griculturl sector is smll, s only 13 per cent of Lesotho s lnd is rble Agriculture is however n importnt economic sector Up to 80 per cent of the popultion live in rurl res, 60 per cent work in this sector, 50 per cent derive their livelihood off the lnd, nd griculture is the lrgest contributor to gross domestic product (GDP) The government hs instituted series of mrket-oriented reforms to encourge 1 Some prt of this rticle is derived from PhD thesis of The potentil impct of trde on the economy of lesotho (2007) 49

2 Modelling the Lesotho economy: A Socil Accounting privte sector investment in griculture The min crops re mize nd whet, lthough there hs been move towrds diversifying into high vlue, high yield crops Lesotho is currently exporting qulity sprgus, peches, nd strwberries Livestock production is substntil contributor to rurl income Much of Lesotho s terrin is suited only for niml production Cttle, wool nd mohir re the mjor exports of this sector Remittnces from Lesotho citizens working on prticulrly gold mines in South Afric hve for long been mjor source of sustennce for mny fmilies Lrge reductions in gold mine employment of Lesotho citizens brought the reliztion tht Lesotho must incresingly look internlly for solutions of its economic problems It is widely ccepted tht Lesotho griculture underperforms in production nd tht mrketing structures for griculturl products re underdeveloped (Integrted Frmework, 2003) Lesotho s mcroeconomic policy is circumscribed becuse of its membership in the Common Monetry Are (CMA) Under CMA, currencies re pegged t prity with the South Africn Rnd This lrgely elimintes monetry policy utonomy Fiscl policy is thus the min mcroeconomic policy instrument t Lesotho s disposl (Integrted Frmework, 2003) Neither cn Lesotho, s member of the Southern Africn Custom Union (SACU), be independent in terms of trde policy SACU members use Common Externl Triff (CET), determined by seprte Triff Setting Bord for products imported from outside (Integrted Frmework, 2003) The country s investment climte offers some ttrctive fetures, such s some fvourble regultions nd reltively stble democrcy The country hs gone through veritble economic boom, lrgely driven by foreign investments in the mssive Lesotho Highlnds Wter Project (LHWP), surge in export mnufctures nd receipts from the Southern Africn Custom Union (UNDP, 2000; Integrted Frmework, 2003) The griculturl sector provides jobs nd income for Lesotho s citizens nd tx revenue for the government in the process of producing nd delivering griculturl output The impcts trnscend the griculture sector becuse of system linkges, including upstrem nd downstrem ctivities, which ffect the economy, s well This cretes dditionl jobs nd income which set in motion further production with dditionl benefits to the rest of the economy This is known s the economic multiplier effect nd it tkes into ccount ll the effects of spending nd income working through complex chin of mrket ctivity There hve been vriety of techniques developed to model such interlinkges in n economy The most widely used hve been sectorl multiplier effects estimted through inputoutput (IO) nlysis nd relted models like the socil ccounting mtrix (SAM) nd computble generl equilibrium (CGE) The dvntge of these models is tht they clculte not just the direct effects but lso the generl equilibrium effects to give more detiled view of n intervention This pper provides estimtes of the griculturl sector s economic impct bsed on detiled SAM of Lesotho The SAM is benchmrked to the yer 2000 The methodologicl pproch relies prtly on descriptive nlysis grounded in this SAM nd series of multipliers derived from the SAM nd structurl decomposition of these This type of nlysis should be useful in the choice of pproprite development strtegy for the Lesotho economy 2 Methodology A SAM is single entry ccounting system whereby ech mcroeconomic ccount is represented by column for outgoings nd row for incomings (Round, 1981) Tylor (1983) views SAM s tbulr presenttion of the ccounting identities, stting tht incomings must be equl to outgoings for ll sectors of the economy The SAM is usully represented in the form of squre mtrix with rows nd columns, which bring together 50

3 Y T Bht dt on production nd income genertion s generted by different institutionl groups nd clsses on the one hnd, nd dt bout expenditure of these entities by them on the other In SAM, incomings re indicted s receipts for the row ccounts in which they re locted nd outgoings re indicted s expenditure for their column ccounts Since ll incomings must be ccounted for by totl outgoings, the totl of rows nd columns must be equl for given ccount A SAM provides conceptul bsis to nlyze both distributionl nd growth issues within single frmework For instnce, SAM shows the distribution of fctor incomes of both domestic nd foreign origin, over institutionl clsses nd re-distribution of income over these clsses In ddition, it shows the expenditure of these clsses on consumption, investment nd svings King (1988) nd Sen (1996) point out tht SAM hs two min objectives: first, orgnizing informtion bout the economic nd socil structure of country over period of time nd second, providing the sttisticl bsis for the cretion of plusible model cpble of presenting sttic imge of the economy long with simulting the effects of policy interventions in the economy It cn be used to improve the cpbilities of countries to obtin descriptive nlysis of the economy, indicting its income distribution picture, institutionl nd industril structure A SAM cn therefore be used s dtbse for mcroeconomic policy modelling Its frmework my contribute to rrngement of different sources of dt in consistent mnner Different sources of dt, such s ntionl ccounts, txtion dt, household surveys, input-output tbles, cn be rrnged into n economy-wide dt frmework In most developing countries economic plnning suffers from number of problems such s insufficient, unrelible nd poor qulity dt Therefore, the best use of vilble informtion becomes incresingly importnt A number of SAMs were developed for number of developing countries in the 1970s, nd since the 1980s there hs been incresing interest in the design, construction nd use of SAMs in these countries (Sen, 1996) Townsend nd McDonld (1998) used SAM pproch to nlyze effects of chnges in griculturl policies on income distribution in South Afric Nielson (2002) used multiplier nlysis to nlyse the economic implictions of Vietnm domestic nd trde policy reform (from centrllyplnned to mrket-bsed economy), thereby requiring the construction of socil ccounting mtrices s the core dtbse As fr s the uthor is wre, published pplictions for Lesotho did not exist t the time of writing SAM bsed multiplier models belong to the clssicl fixed-price generl equilibrium models used to ssess the economic effect of exogenous chnges in income nd demnd Arndt et l (2000) suggest tht SAM nlysis is underpinned by three bsic sets of ssumptions First, since prices re fixed, conclusions re drwn bout quntities on the bsis of vlue shres Second, functionl reltionships re tken s liner in the SAM-columns This implies, inter li, tht Leontief production functions re relied on in the ctivity columns, nd there is no substitution between imports nd domestic production in the commodity columns (Leontief production functions re chrcterized by constnt returns to scle s well s the bsence of substitution in fctor nd intermedite inputs) Third, multiplier models re demnd-driven, nd price effects re not cptured s in CGE model The mtrices tht cn be derived from SAM re used s instruments for economic nlysis This is done by mens of the technicl input coefficients nd the Leontief inverse mtrix (multiplier mtrix) A technicl coefficient (in monetry unit) is defined s the quntity of intermedite inputs which prticulr sector requires from nother sector in order to supply Mloti (Lesotho currency) unit of output 51

4 Modelling the Lesotho economy: A Socil Accounting Formlly X ij = ij (i=1 n) nd (j=1 n) X j Where ij is production coefficient indicting the mount of sectors i s product needed to produce one unit of sector j s product; X ij is the delivery of intermedite goods from sector i to sector j; X j is totl gross input (output of the different sectors) For specific elements in trnsction tble, we hve the following: X X = ; 12 = ; X1n = X 1 X 2 X 1 n X n The technicl coefficients mtrix is collection of technicl coefficients nd is often indicted by cpitl letter A : A ij = n n 2n nn Where (i= n) nd (j= n) Output needed to stisfy given level of gross output cn be shown to be: O= A*X Where X denotes vector of ctivity levels (in vlue terms) in n economy; A denotes the mounts of ech ctivity used by ech other ctivity, t rtes which re ssumed to be independent of the levels of ctivity in X (constnt returns to scle) nd O is vector contining the intermedite demnd for its output nd the totl finl demnd for its input Totl ctivity X stisfies endogenous ( AX ) nd exogenous ( D ) uses Assuming A is prmetric, then ny chnge in D must be ccommodted by corresponding chnge in X X=AX+D Solving for X, the reltionship between D nd ctivity vector X is esily shown to be: A*X +D = X; D= X- A*X Rerrnging the bove eqution, we get: D= (I-A)*X Thus, X= (I-A) -1 *D or M * D The term (I-A) -1 or M is known s the multiplier mtrix or Leontief Inverse Severl types of multipliers were clculted for this study using similr logic: Open SAM or Type 1 output multipliers mesure the effect of chnge in finl demnd (eg n increse in export demnd) for one sector on the output of the whole economy, tking into ccount the inter-sectorl purchses of input goods nd services SAM output multipliers in ddition tke into ccount the distribution of income nd the spending behviour of locl households s more (or less) income is vilble s result of the initil injection 52

5 Y T Bht SAM household multipliers mesure the totl effect of unit chnge in income of prticulr household type on the incomes of ll households in the economy Employment coefficients mesure the mount of employment (mesured in full-time equivlents (FTEs)) required per unit output of ech sector Employment multipliers mesure the totl number of jobs creted in the economy s result of n increse of employment in one sector Although the SAM pproch hs enbled wide-rnging nlysis to be pursued within comprehensive nd internlly consistent economic frmework, its limittions should lso be recognized In prticulr, it does not ccount for new technologies, new products nd mrket pressures tht my come bout s result of the policy intervention 3 The Lesotho Economy nd The SAM The Lesotho SAM ws constructed with bse yer of 2000 by the World Bnk & Conningrth Economists (2002) The SAM hs 53 ctivities, 57 commodities, 10 lbour ctegories, 6 cpitl ctegories, 6 enterprises, 10 household types, cpitl ccount (svings nd investment), government sector nd rest of the world sector For the purpose of this study, the SAM is ggregted into stndrd form of 9 ctivities nd 9 commodities s follows: griculture, forestry nd fishing; mining nd qurrying; mnufcturing; electricity nd wter; construction; wholesle nd retil trde; trnsport, storge nd communiction; finncil nd business service nd lstly community services Households re ggregted by income nd gro-ecologicl zone (urbn high income; urbn low income; rurl high income nd rurl low income) Tble 1: Sving nd investment blnce Mloti % million Sving Generl government Lesotho high lnd wter project Privte sector & prsttls Totl Investment Generl government Lesotho high lnd wter project Privte sector & prsttls Totl Source: Derived from 2000 SAM of Lesotho Tble 2: Government income ptterns Mloti million % Direct txes Indirect txes Customs (SACU) Wter roylties Subsidies Trnsfers Other ntionl government income Totl Source: Derived from 2000 SAM of Lesotho 53

6 Modelling the Lesotho economy: A Socil Accounting A coherent 2000 mcroeconomic profile of the Lesotho economy cn be derived from the SAM From the SAM cn discern tht GDP (from expenditure side) is Mloti 5534 t 2000 mrket prices The proportion of household consumption to GDP is 086 (Mloti 4736), tht of totl investment is 045 Mloti 2479), totl government expenditure 023 (Mloti 1288), export 032 (Mloti 1776) nd import 086 (Mloti 4745) According to Tble 1, the privte sector nd prsttls ccount for the bulk of svings (5789 per cent) nd investment (5159 per cent) respectively The government income pttern is shown in Tble 2 Custom (SACU) txes (4428 per cent) form the lrgest source of government income, followed by direct txes (3155 per cent) Government expenditure ptterns re shown in consolidted form in Tble 3 The lrgest expenditure pyment (2774 per cent) is on the generl public service This includes commodities, fctor pyments (lbour) nd government cpitl ccount Eduction services received 2244 per cent nd other economic services ccounts for 1102 per cent of totl government expenditure Tble 3: Government expenditure pttern per function (Mloti million, 2000 price) Mloti millions % Generl public service Public order nd sfety Eduction service Helth service Socil community Other economic service Rurl development service Public debt Totl Source: Derived from 2000 SAM for Lesotho Tble 4 shows the sectorl contributions to employment, vlue dded nd output in 2000 As in mny other developing countries, the griculturl sector holds dominnt position both in terms of income genertion nd production vlue Agriculture contributes bout 23 per cent to GDP t fctor cost (lmost M93821 million), nd 12 per cent of the totl vlue of production (Tble 4) Food processing is lso importnt nd mkes up 8 per cent of the totl vlue of production The mnufcturing sectors mkes up 11 per cent of totl GDP nd 20 per cent of totl vlue of production Although lrge shre of the lbour force is employed in the griculturl sector (761 per cent of skilled nd 6260 per cent of unskilled lbour) it contributes only 26 per cent of totl lbour vlue-dded, due to the low wges in this sector This lso reflects the poverty incidence, prticulrly rurl res, where mny people rely on subsistence prctices for survivl Tble 4 lso shows the estimtes of skilled nd unskilled lbour demnd in 2000 Mnufcturing nd construction re the second nd third lrgest 54

7 Y T Bht Tble 4: Sectorl contributions to vlue dded, production, employment, cpitl nd mteril inputs Vlue dded (GDP) in production Production Lbour Cpitl Intermedites Vlue (M mill) Shre of totl (%) Shre of totl (%) Vlue (M mill) Shre of totl (%) Shre of skilled (%) Shre of unskilled (%) Vlue of totl, lbour (M mill) Totl shre of lbour (%) Shre of totl (%) Primry Agriculture Forestry Fisheries Mining Food processing Mnufcturing Electricity nd wter Construction Trde nd trnsport service Other services Totl Source: Derived from 2000 SAM for Lesotho 55

8 Modelling the Lesotho economy: A Socil Accounting employers of unskilled lbour (12 per cent nd 7 per cent respectively) More skilled lbour is used in trde nd trnsport services (28 per cent), construction (21 per cent) nd other services such s finnce, business nd insurnce service (21 per cent) The cpitl column of Tble 4 shows the distribution of the cpitl stock Agriculture domintes with 24 per cent of cpitl stock, followed by trde nd trnsport services (18 per cent), other services (finnce, insurnce nd business) (17 per cent) nd construction (16 per cent) Mnufcturing industry nd electricity nd wter rnk fifth nd sixth respectively Finlly, it cn be seen in the lst column tht bout 34 per cent of the construction industry s costs re on intermedite inputs Mnufcturing is responsible for 24 per cent of intermedite input costs The service industries use proportiontely less intermedite commodities in the production process thn construction, mnufcturing nd other goods producers The households were first disggregted into five groups: (i) the urbn res, (ii) the rurl lowlnds, (iii) the rurl foothills, (iv) the rurl mountins nd (v) the rurl Senqu River Vlley (SRV) The disprities do not only exist between urbn nd rurl, nd between regions, but lso between different income groups To ccount for this, the households clssifictions were further disggregted into low nd high-income groups The threshold levels used were tken from the Consumer Price Index Report (BOS (2001)) nd were bsed on the 1994/95 Household Budget Survey Low-income households comprise ll households with monthly income of less thn 500 Mloti, while high-income households hve monthly income equl to 500 Mloti or bove The household expenditure pttern for ech household group distinguished in the SAM is given in Tble 5 Bsed on the expenditure shres, spending on consumption is 88 per cent of totl households expenditure for urbn households (high nd low income), 94 per cent for rurl lowlnds (high nd low income) households, 93 per cent for rurl foothills (both low nd high), 96 per cent for rurl mountin households nd 94 per cent for the rurl Senqu River Vlley households Tble 5: Consolidted household expenditure ptterns (%) Urbn household Rurl Lowlnds Rurl Foothills Rurl mountin Rurl SRV Income High Low High Low High Low High Low High Low group Consumption Household trnsfers Direct tx Svings Foreign trnsfers Totl Note: high income group where income >=500, low income group where income <500, nd SRV= Senqu River Vlley Source: Derived from 2000 SAM for Lesotho As shown in Tble 5, urbn households py disproportiontely more direct txes thn other households They spend 7 per cent of their income on direct txes while rurl lowlnd households spend 5 per cent of their income on direct txes nd rurl foothills 56

9 Y T Bht nd Senqu River Vlley households devote 4 per cent of their income towrds txes Rurl mountin households spend only 1 per cent of their income in direct txes Rurl mountin households spend the most mount on trnsfers to other households (3 per cent) followed by Senqu River Vlley households (2 per cent) All the remining households spend only 1% of their income on household trnsfers Foreign trnsfers constitute n insignificnt prt of ll household expenditures Finlly, urbn households contribute the most to svings (4 per cent of their income) followed by rurl foothills households (2 per cent) The remining households sve very little or zero proportion of their income An importnt piece of informtion reltes to the sources of household income Tble 6 summrises this informtion on household income sources Tble 6: Source of household income (%) Urbn Rurl households Lowlnds Rurl Foothills Rurl mountins Rurl SRV Income High Low High Low High Low High Low High Low group High Skilled lbour Low skilled lbour Enterprise profit Household trnsfer Government trnsfer Foreign trnsfer Totl Source: A 2000 SAM for Lesotho As Tble 6 indictes, low-income households receive the bulk of their income from unskilled lbour wges This is followed by household trnsfers nd government trnsfers for low income urbn households, low income rurl mountin households nd low income rurl SRV households For the low income rurl lowlnd nd rurl foothills households, the second most importnt source of income is government trnsfers, followed by household trnsfers For ll the low income households, foreign trnsfers nd enterprise profits contribute negligible mount to income The income sources for rich households disply some vrition High income urbn, rurl lowlnds nd rurl foothills households derive most of their income from skilled lbour wges, followed by low skilled wges On the other hnd, high income rurl mountins nd rurl SRV households derive most of their income from low skilled lbour wges, followed by high skilled lbour ernings Unlike their low income counterprts, high income households derive significnt mount of income from enterprise profit, which is the third most importnt source of income Trnsfers form n insignificnt prt of high income households 57

10 Modelling the Lesotho economy: A Socil Accounting 4 Multiplier Anlysis 41 Open SAM or Type 1 output multipliers nd SAM output multipliers Tble 7 reports on the results of open SAM nd SAM output multipliers for Lesotho Industries re subsequently rnked ccording to the mgnitude of these multipliers In the clcultion of Type 1 multipliers, only the industry ccounts re treted s endogenous while the behviour households, firms, government nd the rest of the world re treted s exogenous nd independent of industril ctivity levels These multipliers therefore include the direct nd indirect effects but not induced effects When computing the SAM output multipliers, the fctors, ccounts nd household groups re treted s endogenous to the system Thus SAM output multipliers llow for induced feed-bcks s re-spending of incomes occurs The model solves for the structure of production, the distribution nd level of income in the economy simultneously Tble 7: Open SAM nd SAM output multiplier Open SAM Multiplier Rnk SAM Output Multiplier Rnk Agr Forestry & fishing Mining & qurrying Mnufcturing Electricity & wter Construction Wholesle & retil trde Trnsport,stor& communiction Finnce nd business service Community service Source: Author s clcultion The first column in Tble 7 shows tht the lrgest open SAM multiplier effect in the Lesotho economy is tht of construction (1558) followed by mnufcturing (1474), community service (1473), trnsport, storge nd communiction (1295), wholesle nd retil trde (1290), electricity nd wter (1288), mining nd qurrying (1143), finnce nd business service (1119) nd griculturl, forestry nd fishing (1115) In the cse of construction, the results imply tht n increse of Mloti 100 in demnd for construction output genertes n dditionl Mloti 558 in the output of the locl economy, s construction expnsion increses the demnd for inputs nd services in the Lesotho economy The reltively low multipliers for griculture, forestry nd fishing indicte tht this sector purchses few inputs This is indictive of low degree of commerciliztion in the sector However, in generl the multipliers re ll firly low, s would be expected given the open nture of the Lesotho economy which implies higher lekges The third column in Tble 7 shows SAM output multipliers Construction gin hs the highest vlue t 1767, followed by community service (1736), mnufcturing (1722), wholesle nd retil trde (1621), electricity nd wter (1596), trnsport, storge nd communiction (1594), griculturl, forestry nd fishing (1592), nd mining nd qurrying (1548) The lowest SAM output multiplier is tht of finnce nd business service (1476) Thus, re-spending by households whose income comes minly from these sectors helps to generte dditionl output effects over nd bove those relting to inter-industry dependencies 58

11 Y T Bht It is interesting to note tht griculture improves in its rnking from being lst for Type 1 multipliers to being 7 th for output multipliers This is reflective of the sector s importnce in terms of income genertion for the economy In generl however, lthough ll the SAM output multipliers exceed the open SAM vlues (becuse income-relted expenditure chnges re llowed for), few sectors chnge rnk significntly Trnsport, storge nd communiction slips from 4 th to 6 th plce, mining nd qurrying from 7 th to 8 th plce, mnufcturing from 2 nd to 3 rd plce nd finnce nd business service from 8 th to 9 th plce, suggesting tht the induced effects in these sectors re reltively smll in mgnitude This, in turn, cn be trced bck to the low fctor ernings ssocited with these sectors in the bse yer of the model 42 SAM household multipliers Household multipliers mesure the totl effect of unit chnge in income of prticulr household group on the incomes of ll households in the economy This effect might be brought bout by, for exmple, chnge in the income tx regime, or chnge in vlue of trnsfer ernings (socil security pyments, pensions, etc) from outside the region One interprettion of these multipliers is tht they mesure the "trickle-down" effect of chnged income or welth in one group on society in generl The results re shown in Tble 8 Tble 8: SAM household multipliers Totl HH Urbn Rurl Multiplier Agr Forestry & fishing Mining & qurrying Mnufcturing Electricity & wter Construction Wholesle & retil trde Trnsport, stor &communiction Finnce nd business service Community service Source: Author s clcultion A distinction is mde between urbn nd rurl households Results show limited "trickle-down" effect Incresing incomes of the urbn popultion is less efficient wy of incresing incomes cross the bord thn incresing those of rurl households This result cn be explined by the erlier observtion tht higher income households hve higher lekges in the form of higher sving nd import consumption propensities Agriculture exhibits the highest household multiplier, both for the ggregte nd the disggregted household groups This reinforces the importnt role of griculture for household consumption Mining hs the second highest multiplier in the economy 43 Employment coefficients or direct lbour multipliers Employment coefficients (direct lbour multipliers) mesure the mount of employment FTEs (full-time equivlent) required per unit output of ech sector As shown in Tble 9, the highest coefficient is tht of griculture, forestry nd fishing (37733 FTE jobs required per million Mloti of own output) Mining nd qurrying, 59

12 Modelling the Lesotho economy: A Socil Accounting leds the rest of the sectors, with FTEs per million Mloti of output, followed by community services Tble 9: Employment coefficient nd multipliers employment Output (Million Mloti) Employment coefficient* Employment multiplier** vlue rnk vlue rnk Agr Forestry & fishing Mining & qurrying Mnufcturing Electricity & wter Construction Wholesle & retil trde Trnsport,stor&com muniction Finnce nd business service Community service Notes: * nd ** FTEs per Million Mloti chnge in finl demnd nd output per FTE (Million Mloti) respectively Source: Author s clcultion Employment multipliers mesure the increse in totl employment resulting from unit increse in employment in one prticulr sector Tble 9 shows tht the highest vlues, with over 4 FTE jobs generted for everyone in the initil sector re those of griculture, forestry nd fishing nd of mining nd qurrying These results confirm the importnce of primry sectors in Lesotho employment genertion 5 Conclusion Agriculture is the bckbone of the economy of Lesotho, contributing significntly to GDP, vlue of production nd employment genertion However, the potentil for development in griculture is smll due to scrcity of rble lnd Yet despite this, griculturl development is the min wy of providing livelihood for the mjority of the popultion This pper hs used SAM of 2000 to nlyse the structure of the Lesotho economy nd the respective contribution of griculture SAM multiplier nlysis clerly estblishes the criticl role of griculture in the economy Agriculture hs the highest employment coefficient The employment multiplier nlysis indicted tht griculture, forestry nd fisheries s well s mining nd qurrying generte 4 FTE jobs per million Mloti increse in production The SAM household multipliers lso indicted tht in rurl nd urbn res, increses in the griculturl nd mining sectors respectively generte the lrgest increses in household incomes Construction sector hs the highest open SAM nd SAM output multiplier The importnt role of griculture is reinforced by the SAM structure nd multiplier nlysis The nlysis further provides empiricl support for the development of n griculture-bsed strtegy tht encourges lbour-intensive griculturl production Such 60

13 Y T Bht development strtegy will require reorienttion of government polices towrds the immedite objective of improving griculturl productivity The study provides cler exmple to other developing economies, especilly in Sub Shrn Afric, to encourge the improvement of griculturl productivity s prerequisite for improving rurl livelihoods nd reduction of poverty However it is importnt to keep in mind some of the limittions of the pproch Importntly, SAM nlysis does not llow for the incorportion of effect from new technologies, new products nd mrket pressures which re ll extremely importnt This suggests tht the results need to be interpreted nd used cutiously Using SAM nd its multipliers to nlyze nd ssess the outcome of griculturl sector of the Lesotho economy hs been bsed on simple ssumptions bout economic behviour by sectors nd households, such s liner production reltionships nd unlimited supplies This ment tht reltive prices did not ply big role nd the entire model ws demnd-driven An importnt re for future study would therefore be modelling more complex economic behviour nd price formtion through technique such s Computble Generl Equilibrium (CGE) model References Ardnt, C, Jensen, HT & Trp, F (2000) Structurl chrcteristics of the economy of Mozmbique: A SAM bsed nlysis Review of Development Economics 4(3): BOS (2001) Bureu of sttistics Consumer Price Index Sttisticl Report, Mseru Chndr, V, Jock, A, Shshi, K & Ngnou, JP (2002) Lesotho: Sources of growth nd employment options study: Bckground Ppers: Recent Economic Developments Mimeo, Southern Afric Deprtment, the World Bnk Integrted Frmework (2003) Lesotho: Dignostic trde integrtion study, Volume 1, Integrtion into the World Trding Environment, mimeo King, B (1988) Wht is SAM? quoted In: SEN, H (1996) Socil Accounting Mtrix (SAM) nd its impliction for mcroeconomic plnning Unpublished Assessed Article, Brdford University, Development Project Plnning Centre (DPPC), Brdford, UK Ngnou, JP (2004) Estimting the key prmeters of the Lesotho CGE model Americn University Pper prepred for the Interntionl Conference Input- Output nd Generl Equilibrium: Dt, Modelling, nd policy Anlysis, Brussels (Belgium) Nielson, CP (2002) Socil Accounting Mtrix for Vietnm 1996 nd 1997 Dnish Reserch Institute of Food Economics (FOI), Trde nd Microeconomics Division Interntionl Food Policy Reserch Institute Round, J (1981) Income distribution within Socil Accounting Mtrix: A review of some experience in Mlysi nd other LDC s Development Economics Reserch Centre-University of Wrwick, Discussion Pper No, 3 Sen, H (1996) Socil Accounting Mtrix (SAM) nd its impliction for mcroeconomic plnning Unpublished Assessed Article, Brdford University, Development Project Plnning Centre (DPPC), Brdford, UK Tylor, L (1983) Structurlist mcroeconomics: Applicble models for the Third world New York: Bsic Books Inc Townsend, RF & Mcdonld, S (1998) Bised policies, griculture nd income distribution in South Afric: A Socil Accounting Mtrix pproch, Studies in Economics nd Econometrics 21(2):

14 Modelling the Lesotho economy: A Socil Accounting UNDP (2000) Common country ssessment, Lesotho, United Ntions wwwundporgls/publictions%20nd%20reports/ccpdf Vn Schlkwyk, HD nd Jooste, A (2002) The Externl Agriculturl Trde Environment of Lesotho with Specific Reference to Trde Agreements Compiled s prt of lrger Study investigting reforms to Lesotho s Agriculturl mrketing Act, Mseru, Ministry of Trde, Industry nd Coopertion World Bnk & Conningrth Economist (2002) Notes on the methodologies nd dt used for compiling Socil Accounting Mtrix (SAM) for Lesotho for 2000 Finl Report 62