mismanaged mineral dependence: zambia 1970–90

Zambia, like other copper producers, took the high late 1960s copper price as the norm and regarded the mid-1970s mineral price fall as an aberration. It adjusted by foreign borrowing rather than by structural change. Consequent- ly, when the early 1960s price shock drove copper revenues even lower, Zambia had little room for manoeuvre. The cumulative scale of the required adjustment then impeded IMF-backed reforms and further delayed the diversification into farming, agroindustry and labour intensive manufactures which the country’s shrinking copper ‘bonus’ dictates.

Mismanaged mineral dependence

Zambia 1970-90

R.M. Auty

R.M. Auty is with Lancaster University, Lancaster LA1 4YB, UK.

The financial assistance of RTZ is grate- fully acknowledged.

‘G. Nankani, Development Problems of Mineral Exporting Countries. World Bank Staff Working Paper 354, World Bank, Washington, DC, 1979. ‘A.H. Gelb, Oil Windfalls: Blessing or Curse?, Oxford University Press/World Bank, New York, 1988. %.M. Auty, ‘Internal constraints on prudent oil windfall deployment: Nigeria and Cameroon’, Geoforum, Vol 19, 1988, pp 147-l 60. %. Harvey, ‘Successful adjustment in three developing countries: _ Botswana, Malawi and PNG’. Mimeo. Economic De- velopment Institute, World ‘Bank, Washing- ton, DC, 1986.

This paper analyses Zambian management of the mineral price shocks of the 1970s and 1980s in the context of the experience of other developing mineral economies. The mineral economies are defined as that group of countries which derive more than 10% of their GDP and more than 40% of their exports from the mineral sect0r.i Their disappointing rates of growth and of structural change reflect a tendency to place excessive dependence on the mineral sector for revenues and foreign exchange.

High mineral dependence is associated with over-rapid windfall absorption during booms, which establishes patterns of consumption and investment which are difficult to sustain through subsequent downswings. Dutch disease effects during mineral booms reduce the capacity of the non-mining tradables sector to compensate for lower mining revenues through downswings. The economic gains made during the upswing are eroded and may not even compensate for post-boom losses.’

In extreme circumstances the mining sector may become virtually the only competitive sector.3 Even then, post-boom shortages of foreign exchange and revenues can make demands on the mineral sector which threaten its viability. For Zambia the risk of reliance on mining is further heightened by the impending depletion of its copper resource. The prudent management of mineral dependence under such conditions requires rapid competitive diversification of the non-mining tradables sector (agriculture and manufacturing) and the steady broadening of the tax base.

Harvey argues that these diversification goals are best pursued within the framework of a cautious (orthodox) macroeconomic policy.4 The present paper concurs with his view but argues for a departure from orthodoxy in one important respect: the assumption of sectoral neutral- ity should be dropped and instead the mining sector should be viewed as an economic ‘bonus’ with which to accelerate structural change, rather than as the backbone of the economy. This paper also shows how, under unfavourable external circumstances, the consequences of an initial policy error can accumulate through the operation of a negative feedback loop (Figure 1).

The paper first examines the pre-shock resilience of the Zambian

170 0301-4207/91/030170-14 @ 1991 Butterworth-Heinemann Ltd

Mismanaged mineral dependence: Zambia 1971LL90

Constraints

Consolidating loop

Political Economic Execution

Regime Regime Preconditions

Macro- Administrative External/ resolve goals policy capability internal shocks

I I

Diversified Competitive I

Long-term REER

+structure + /National welfare I Low debt

Ftscal d Effective

i Ethical \

Strong balance

Positive

Corroding loop -

Weak Short-term -Clientalistic

Uncompetitive Overvalued 1

Negative

Jr NM tradables aFtEER

Inefficient /

Rent dispensing I High debt

Frscal +Corrupt

deficit

Figure 1. Cumulative feedback loops: polar cases.a

aREER = real effective exchange rates; NM = non-mining.

5R.M. Auty, ‘Mineral exporter response to price volatility: the early-l 970s preconditions’, Working Paper 91, Lancaster University, 1990. 6J. Kydd, ‘Coffee after copper? Structural adjustment, liberalization and agriculture in Zambia’, Journal of Modern African Stu- dies, Vol26, 1988, pp 227-251.

RESOURCES POLICY September 1991 171

political economy, noting the seeds of future problems among the apparently favourable circumstances. In the second section of the paper the price shock of 1974-78 is measured and the Zambian macroeconomic response is described and evaluated. Section three repeats the exercise with respect to the 1979-83 shock. Attention then shifts to micro aspects and the fourth part of the paper analyses trends in the viability of Zambia’s copper mining sector. The fifth section assesses progress in the competitive diversification of the non-mining tradables sector. The final section of the paper summarizes the policy implications for Zambia and other hard mineral economies.

Pre-shock development prospects

High initial copper dependence

Zambia had one of the highest per capita incomes in Black Africa on achieving independence in 1964, and it owed this distinction primarily to the mining sector. Zambia was unusually dependent on its mineral sector. The Zambian mineral dependency index (which is derived from the mean percentage contribution of mining to GDP, exports and revenues) was a remarkably high 67 in 1965. This compares with indices for Latin American mineral exporters in the early 1970s which ranged down from 47 for Bolivia through 33 for Chile to 21 for Peru.5 In the early years of independence through to the late-1960s copper prices were roughly twice production costs,6 yielding high rents which established patterns of investment and consumption which proved unsustain- able.

Political circumstances appeared favourable for competitive diversification. The newly independent government commanded strong sup-

Mismanaged mineral dependence: Zambia 1970-90

Source: Ft. Gulati, Impasse in Zambia: Econo- mics and Politics of Reform, EDI Development Policy Case Series, 2, World Bank, Washington DC, 1989; and World Bank, World Tables 798% 90, World Bank, Washington, DC, 1990.

‘1. Kaplan, Zambia: A Country Study, American University, Washington, DC,

1979. sM. Syrquin and H.B. Chenery, Patterns of Development, 1950 to 7983, World Bank Discussion Paper 1, World Bank, Washington, DC, 1989.

Sources: M. Syrquin and H.B. Chenery, Patfems of Development, 1950 to 1983, World Bank Dis- cussion Paper 1, World Bank, Washington DC, 1989; World Bank, World Jab/es, 7989-90, World Bank, Washington, DC, 1990.

172 RESOURCES POLICY September 1991

Table 1. Zambian economic performance, 1970-88.

Fiscal balance (% GDP) Current account (% GDP) Debt-GNP ratio Real effective exchange rate

Memo item: GDP growth (%/year)

Zambia Chile PNG Bolivia All developing countries

1970-74

iZ:S 0.39

115.3

1967-73

2.4 2.2 6.5 4.7 6.5

1975-79 1980-93 1984-87

(I 5.0) (14.0) (12.1) (10.6) (14.5) (10.6)

0.81 0.96 2.50 82.7 82.3 46.6

1973-80 1980-88 i 973-88

1.2 0.9 1.1 2.4 2.2 2.3 2.2 2.0 2.1 3.5 (1.1) 2.2 5.1 3.9 4.5

port and espoused policies for the promotion of long-term national welfare which it followed consistently for almost two decades. Zambia was aware at independence of the risks of over-reliance on copper. Copper provided three-fifths of recurrent revenues in the mid-1960s and the government followed a 1964 UN recommendation to diversify its revenue sources.7 The government also prudently established a mineral stabilization fund (MSF) to accumulate revenues during booms in order to dampen them and to offset the downswings. Some success was achieved in revenue diversification. As mine revenues shrank below two-fifths of total revenues, income taxes expanded in the period 196674 from 10% to 18% of recurrent revenues while sales/excise taxes rose from 12% to 23%. However, the tax reforms failed to reach the scale required by the deterioration in copper revenues throughout the early 1970s. Zambia still ran a budget deficit equivalent to 5.2% of GDP in 197&74 (Table 1) and the MSF was abandoned in 1972.

The policies of the Zambian government reflected the prevailing optimism about socialist development. Consequently, like Peru (but unlike PNG and Chile), the policies transferred large sections of the economy into the public sector without adequate safeguards for the efficiency of resource use. The Zambian economy had already been significantly weakened by these policies when the 1974-78 mineral price shock struck. GDP growth averaged only 2.4% in 1967-73 (Table 1) on a declining trend. This rate was around half that for a group of South American mineral economies and one-third the rate for the developing countries as a whole.

Table 2 shows that in the early-1970s the composition of Zambian absorption differed significantly from the Syrquin and Chenery8 norms for countries at a similar level of development. In fact, the Zambian pattern resembled that of another small mineral economy close to independence, namely PNG. Gross investment in the early 1970s was almost 50% above the norm while government spending was nearly twice the norm. However, Zambia lacked the large inflow of aid which PNG received from Australia. Moreover, the high rate of Zambian investment did not herald rapid economic growth. The declerating GDP

Table 2. Composition of absorption, Zambia (% GDP).

Actual composition

1972 1980 1988

GNP per capita (US$1980) 770 800 210

Private consumption 39.8 55.2 69.0 Public consumption 23.4 25.5 17.1 Gross investment 35.3 23.3 11.4 Total absorption 98.5 104.0 97.5

Syrquin and Chenery norms

770 600 210

68.1 69.4 77.6 13.6 13.5 12.4 22.4 21.4 15.1

104.1 104.3 105.1

Sources: World Bank, World Tab/es, 198+90, World Bank, Washington, DC, 1990; A. Wood, Global Trends in Real Exchange Rates 1960 to 1984, World Bank Discussion Paper 35, World Bank, Washington, DC, 1988; Ft. Gulati, impasse in Zambia.. Economics and Politics of Reform. EDI Development Policy Case Series 2, World Bank, Washington, DC, 1989.

90p tit, Ref 5. ‘%. Dumont and M.-F. Mottin, Strangle- hold on Africa, Andre Deutsch, London, 1983. “J. Levi and A. Mwanza, ‘Agricultural policy issues’, in H. O’Neill et a/, eds, Trans- forming a Single Product Economy: Ex- amination of First Stage of Zambia’s Re- form Program 7982-86, Economic De- velopment Institute, World Bank, Washing- ton, DC, 1987, pp 161-226. “A MacBean, Structural Adjustment in Zambia, Working Paper, World Bank, Washington, DC, 1987.


Table 3. Structure of production, Zambia (% GDP).

GNP per capita (US$ 1980)

Mining Non-mining

Agriculture Manufacturing Construction Services

Dutch disease index

Actual structure

1972 1980

770 600

25.5 16.4 74.5 83.6 12.8 14.2 13.5 18.5

7.0 4.5 42.2 46.4 17.7 12.7

1988

210

12.6 87.4 14.2 24.8

4.5 43.9 17.4

Syrquin and Chenery norms

770 600 210

7.2 8.8 2.0 92.8 93.2 98.0 26.9 29.9 45.9 17.1 15.5 10.5

5.2 5.0 4.1 43.6 42.8 37.5

growth through the early 1970s reflected the waning stimulus from import substitution industry which subsequently failed to offset the impact of declining copper prices.

Limitedpre-shock diversification

Pre-shock progress in reducing the country’s dependence on copper was minimal. Non-mining exports - almost all agricultural - accounted for less than 3% of total exports in the early 197Os, with a declining trend. Although farming employed almost two-thirds of the population, it generated less than 13% of GDP in 1972, well below the Syrquin and Chenery norms for a country at a similar level of development (Table 3). Commercial farming was oriented to the Copper Belt and exports were negligible. The manufacturing sector, although expanding rapidly, was also smaller than the norm. Consequently, Zambia had a relatively high Dutch disease index of almost 18 compared with indices in 1972 of 6 for Chile, 5.5 for PNG and 5 for Peru.’

The remarkable shrinkage in the relative size of agriculture did not result from an unfavourable resource endowment. Dumont and Mottin” suggested that during the 1970s Zambian agricultural production remained far below its potential. The fertile 12% of the land area could amply meet all domestic agricultural needs. The fertile area is defined as that land capable of growing maize continuously and lies in two triangles of plateaux: one (the smallest) is north-east of the infertile rift valley, while the other is to the south-west. The fertile area accounted for most commercial farming and ran along the railroad where about 1000 large farms and 20 000 emerging mid-size holdings were located at independence. The moist, but less fertile, northern zone was best suited to root crops: it contained the majority of shifting peasant cultivators but little commercial production. The semi-arid western zone was suited to pastoralism.”

Early post-independence efforts by Zambia to close the gap between indigenous and expatriate earnings in the modern sector had unfortun- ate consequences for agriculture. The real incomes of urban workers were raised by encouraging rapid pay increases and keeping food prices low. The latter discouraged commercial farming since the barter terms of trade between rural and urban areas declined 20% in 1964-73.” The institutions adopted for the farm sector also proved counterproductive. Cooperatives were initially favoured and established with copper revenues. They failed but subsequent efforts to encourage family farming fared little better in the face of low domestic prices. Fewer than 5% of Zambia’s 600 000 farmers were enticed into commercial operation: most cultivated a few hectares by slash and burn. Agricultural production barely kept pace with the rate of population growth: rural incomes



Table 4. External shocks, Zambia, Chile and PNG 1970-87.

Terms of trade 1970-74 1975-79 1980-83 1984-87

Zambia 216.5 101.3 82.2 73.2 PNG 121.2 127.0 93.1 93.4 Chile 192.6 103.4 87.3 80.1

Sources: World Bank, World Tables, 198%90, External shocks (% GDP) Terms of trade Terms of trade and interest World Bank, Washington, DC, 1990; J.D. Sachs, 1974-78 1979-83

‘External debt and macroeconomic performance Zambia -22.6 -13.6 in Latin America and East Asia’, Brookings Pap- PNG 5.9 -14.9 ers on Economic Activity, No 2, 1985, pp 52% Chile -10.6 -3.2 73.

declined in real terms after independence and were only one-fifteenth the urban average in 1970.

This urban bias would have mattered less if the manufacturing sector had been growing rapidly and efficiently. However, Zambian manufacturing had lagged before independence on account of the country’s membership of the Central African Federation which brought direct competition with Zimbabwe. Zambia produced only one-third of its manufactured goods at independence. Import substitution caused manufacturing to grow at an annual rate of 11% in 1965-70, with chemicals and vehicles especially prominent. However, the import substitution drive was accompanied by an extension of state ownership which commenced in 1968. State ownership proved overambitious and outstripped implementation capacity. The quality of the civil service declined with the steady politicization of appointments.13

Meanwhile, foreign and expatriate owned industry was criticized for putting profit ahead of national development. Slower profit repatriation and other restrictions discouraged foreign investment. By the mid-1970s almost all the large industrial plants in Zambia had majority or total state ownership. Copper also fell under state control, despite initial government assurances to the contrary. Spurred by the prevailing antimultinational feeling in developing countries, the Zambian government acquired 51% of Anglo-American and Roan Selection Trust (RST) in January 1970. It increased state control further towards the close of 1974 (with the cancellation of the two multinationals’ 10 year management and sales contracts) and again in 1979 (when the multinationals declined to expand their equity participation).

The overall effect of post-independence policies was to deploy high rents from copper primarily to expand and reinforce a powerful urban rent seeking constituency whose income from mines, factories and offices outstripped productivity. Some 37% of Zambia’s population was urbanized by the mid-1970s, a much higher proportion than in most African countries.14 Like similar pressure groups in other countries, Zambia’s urban constituency became a formidable constraint on policy reform. Its creation retarded progress towards competitive diversification in the first decade after independence and weakened the Zambian economy.

“FL Gulati, Impasse in Zambia: Econo- Adjustment to external shock, 1975-79

mics and Politics of Reform, EDI Develop- Zambia’s terms of trade halved in 1975-79 as compared with 1970-74, in ment Policy Case Series 2, World Bank, Washington, DC, 1989.

sharp contrast to the mild improvement experienced by PNG’s less

“World Bank, World Development Report copper dependent economy (Table 4). The deterioration in Zambia’s 7978, World Bank, Washington, DC, 1978. terms of trade was slightly steeper than that experienced by Chile, but



the consequences were much more severe for the Zambian economy. The subsequent Chilean economic trajectory to 1990 was one of recovery from the sharp regression of the early 1970s while Zambia was more like Peru in experiencing accelerated weakening.

The terms of trade deterioration translated into a negative shock equivalent to the loss of more than 22% of GDP for Zambia. This compares with a shock for Chile of just less than half that size, which was still very severe. Zambia’s brief, albeit modest, relief from chronic current account and fiscal deficits of 1974 quickly evaporated. In 1975 the current account deficit was equivalent to 27% of GDP while the fiscal deficit was equivalent to almost 23% of GDP. In contrast to Chile, which quickly embarked on a radical restructuring of its economy, Zambia chose to postpone adjustment to the first price shock.

15M.W. Bell, ‘Government revenue stabi- lisation in primary-producina countries: a model for iambia’, ‘Journal Gf Modern Afri- can Studies, Vol 21, 1983, pp 5.5-76. 16A. Wood, Global Trends in Real Ex- change Rates 1960 to 1984, World Bank Discussion Paper 35, World Bank, Washington, DC, 1988.


The Zambian government interpreted the mid-1970s copper price fall as temporary and concentrated on stabilization rather than long-term

adjustment. However, the consumption patterns acquired during the late-1960s boom proved difficult to curb. The government maintained its share of consumption in GDP at around 25% which, although similar to that of PNG, was very high for a developing country and impractical in the absence of a positive contribution from the mining sector. l5 The parastatal sector, which grew rapidly after independence and reached 30% of GDP and 60% of investment by 1980, became an increasing drain on public revenues.

Revenues fell short of expenditures in 1975-79 because non-mining taxes failed to offset the almost total loss of copper revenues (which had provided two-fifths of total revenues through the early 1970s). Table 1 shows that the budget deficit averaged 15% of GDP in 1975-79. The growth in government expenditure, which decelerated through the early 197Os, did fall in real terms in 197479 by 4.5% annually. However, Zambian adjustment not only lagged the fall in recurrent revenues, it also fell disproportionately heavily on capital expenditure. The rate of investment, which had averaged almost 34% of GDP in 1972-74, declined through the late 1970s to just under 21% in 1977-79.

The real exchange rate declined by around 25% in 1974-75 and by a further 16% up to 1978.16 The volume of merchandise imports almost halved in 1974-79, with severe consequences for import dependent sectors like manufacturing and mining. The overall efficiency of investment declined from a disappointing ICOR of 7 in 1967-73 to 24 for 1973-79. GDP growth halved through the late 1970s to 1.2%) compared with 4% for Peru, 2.4% for Chile and 2.2% for PNG. However, Zambia’s current account deficit remained stubbornly high at 10% of GDP through the years 1975-79.

Foreign borrowing provided the principal adjustment mechanism to external shock. The annual increments in foreign debt in 1975-79 exceeded $400 million, equivalent to 17% of mid-1970s GDP each year. Zambia’s total foreign debt tripled in 197479 to $3 billion, a level slightly above total GDP and more than twice the ratios for Chile, Peru and PNG. The exhaustion of the MSF in 1972 brought increased recourse to short-term financing, which leapt from half to almost 90% of government borrowing in 1972-78. Real interest rates turned negative and discouraged saving while credit (like foreign exchange) was rationed and its allocation was slow and inefficient. Domestic government borrowing was sourced from the banking system and raised price inflation to nearly 17% in the late 1970s. When copper prices streng-

Mismanaged mineral dependence: Zambia 197&90

I70 A G. Norton, Resource Depletion and . . Terms of Trade Collapse: The Zambian Disease, Working Paper 88/2, Centre for Economic Research, University College Dublin, Dublin, 1988. I’M. Ndulo and D. Norton, ‘Macroecono- mic policy issues’, in H. O’Neill et a/, eds, Trarkfortking a Single Product Economy: Examination of First Staae of Zambia’s Reform Program 1982-86; Economic De- velopment Institute, World Bank, Washing- ton, DC, 1987. 19N.S. Makgetla, ‘Theoretical and practical implications of IMF conditionality in Zam- bia’, Journal of Modern African Studies, Vol24, 1986, pp 395-422.

176

thened at the close of that decade, Zambia, like the other copper exporters, eased its adjustment measures.

Lagged adjustment 1980-88

The Zambian terms of trade improved somewhat in 1979, albeit to a level barely half that of the early 1970s. A response which Zambia shared with the other copper producers was to permit a real effective exchange rate appreciation. In the case of Zambia this was a rise of some 13% in 1978-79, which plateaued in 1979982. The rate of debt accumulation slowed, falling to the equivalent of only 10% of GDP per year through 1980 and 1981. GDP grew vigorously through 1979-81 after three consecutive years of decline. As the current account and budget deficits eased in 1979 expectations rose for brighter medium- term prospects. As elsewhere, the improvement proved a false dawn which postponed structural change and thereby made the subsequent adjustment even harsher and more unpalatable.

The average fiscal and current account deficits for 1980-83 were little different from those of the late 1970s (Table 1). But the terms of trade once more deteriorated and the adverse effect was magnified in 1982 by the international debt crisis. Zambia experienced a negative shock in 1979-83 which, although it was smaller than that of the mid-1970s or that experienced by PNG in 1979-83, was still equivalent to the loss of 13.6% of GDP (Table 4). By 1983 Zambian foreign debt amounted to $3.7 billion and debt service to 50% of exports. Arrears on debt service had accumulated to 100% of GDP.i7

Zambia could no longer rely so heavily on foreign borrowing for adjustment and it sought IMF assistance with structural change. The IMF-backed measures introduced at the beginning of 1983 were subsequently reinforced when copper fared even worse than expected. They comprised devaluation and an easing of central controls. The fixed exchange rate was relaxed in mid 1983 in favour of a crawling peg regime. The nominal exchange rate had declined to K2.2/$1 by 1985, barely one-third its 1980 value, but the IMF still regarded it as overvalued if structural change was to be effective.i*

Export oriented users of domestic inputs located in non-urban areas were granted maximum income tax relief, whether domestic or foreign. Exporters were also allowed to retain half their foreign exchange, but the copper industry was unwisely discriminated against since it was limited to only 35% retention. l9 Import licensing was also eased: quotas were removed from 50 items and tariffs were narrowed to a 15-100% range, with most imports carrying a duty of 30-40%. Sizable trade surpluses emerged and the current account improved - but it remained in deficit to the equivalent of 6.5% of GDP in 1983-85.

The cost of adjustment bore down heavily on import dependent activity and urban residents. An exchange rate depreciation shifts resources from urban to rural interests, as does the removal of price controls which have discriminated against small farmers. The effect of Zambian price controls in 1974-79 had been to push the barter terms of trade a further 30% against farmers. The mid-1980s’ measures cut the real value of imports to barely half the 1980 level and one-quarter that of 1974. Recession pushed the share of investment in Zambian GDP down to one-third of its 1972 level (Table 2), a figure well below the Syrquin and Chenery norm. GNP contracted each year from 1981 to

RESOURCES POLICY September 1991

Mismanaged mineral dependence: Zambia 197690

1984 and scheduled external debt service approached 70% of exports by mid-1985.

The Zambian political economy was now firmly enmeshed in a corroding feedback loop (Figure 1) since the scale of the required change made adjustment painful, especially for the urban poor. The slow rate of improvement in the fiscal deficit reversed and prompted the IMF to demand stronger measures. The key measure was the foreign exchange auction introduced in October 1985. Although the auction removed some biases against efficient users of foreign exchange, it was badly implemented and encouraged overshoot. The real exchange rate depreciated to half its early 1980s level and stoked domestic inflation, which neared 50% in 1986 compared with historic levels of 12% or less before the 1983 IMF agreement.

All remaining controlled prices other than for maize were abolished, while the Agricultural Marketing Board monopoly was ended in 1986. To achieve a real wage decline the government pursued wage restraint, both in the civil service and private industry. As a budget deficit equivalent to 30% of GDP loomed in 1986 (against the IMF target of 9% by 1987), the government removed the $800 million subsidy on maize. Maize prices doubled and triggered urban riots which spread from the Copper Belt to Lusaka. The subsidy was restored and further cuts were sought in social and economic investment. In April 1987 the government sought to reduce fuel subsidies but once again backed down when riots threatened.

Excessive depreciation of the currency combined with threats of civil disturbance to unnerve the government. Meanwhile, external debt which had plateaued around $3.7 billion in the early 198Os, jumped to $6.45 billion in 1987 and the debt-GDP ratio reached a staggering 370%. The foreign exchange auctions were halted and the exchange rate fixed at K8/$1. While the previous rate of 20 had been too low, the new rate was too high. Domestic price, c .::ere frozen, commercial interest

rates were cut from 36% to 20% (strongly negative since inflation exceded 50%) and debt service was limited to 10% of exports.

The restoration of controls dampened urban unrest but did nothing to arrest the economic deterioration, so IMF assistance was once more sought in 1989. An examination of the sectoral impact of macroeconomic policy shows the cumulative and parallel build up of rigidities in the mining and non-mining tradables sectors.

Copper decline

During the decade of Zambia’s protracted stabilization after the first price shock, the efficiency of the mining sector was corroded. The share of mining in Zambian GDP halved in 1972-88 (Table 3). This reflected not only the fall in real copper prices but also a one-third reduction in physical production. As with the manufacturing sector, the extension of state ownership in mining occurred without adequate safeguards for the commercial autonomy of the firm.

Post-nationalization decline

“M. Radetzki, State Mineral Enterprises: Radetzki*’ suggests that the nationalization of mining firms in develop-

An Investigation into Their Impact on Inter- ing countries initially depresses performance, but that most efficiency

national Mineral Markets, Resources for losses are recouped over a 10-15 year period. The Zambian copper

the Future, Washington, DC, 1985. industry’s post-nationalization performance corresponds less to the



*‘R.M. Auty, ‘Multinational resource corporations, nationalization and diminished viability: Caribbean plantations, mines and oilfields in the 197Os’, in C.J. Dixon, D. Drakakis-Smith and H.D. Watts, eds, Multi- national Corporations and the Third World, Croom Helm, London, 1986, pp 160-187. 220p tit, Ref 20. 23P. Viterbo and H. Wallard, ‘Crisis in the commodities market: are LDCs to blame?‘, Natural Resources Forum, Vol 8, 1984, pp 307-313.

178

Radetzki model than to one based on the Caribbean. Research there indicates that a smooth state takeover is followed by several years of apparent success which mask an underlying deterioration in managerial efficiency and plant maintenance. The weakened state owned enterprise (SOE) is then vulnerable to collapse in the face of unexpected external or internal shocks.21

Zambian copper output peaked at 720 000 tonnes in 1969, the year before majority state ownership was secured. Plans for expansion to 1.2 million tonnes proved unrealistic. In fact, the country’s global market share fell from 11% in 1969-71 to 4.7% in 1986-88 (while Chile and Peru doubled their market shares to 21% and 6% respectively). Geological problems as well as mismanagement were responsible for Zambia’s poor performance. The Zambian copper industry experienced a 20% reduction in ore quality during the 1970s which reduced effective capacity. Having fallen by around 100 000 tonnes during the 1970s output dropped from 592 000 tonnes in 1982 to 416 000 tonnes in the year to March 1989. By then ore reserves were estimated sufficient to maintain existing production levels for only 15-20 years.

Consistent with the Caribbean model, the corrosion of commercial autonomy was gradual rather than abrupt. The Zambian government was initially cautious, taking a 51% equity stake in the multinational subsidiaries in 1970 but leaving its private partners with managerial responsibility. However, the government cancelled the management contracts in 1974 and undertook the direct appointment of executives. Its equity stake increased to 60% in 1979 when the multinationals declined an invitation to make further equity investment and it merged the two original mining companies in 1982 to form ZCCM.

From 1974 the state interest at boardroom level was represented by the Ministries of Mines, Finance and Development Planning, which sought profit maximization subject to the maintenance of employment and the Zambianization of personnel.22 In practice, concern for unem- ployment prevented ZCCM from shedding labour: the 50 000 or so direct workforce was estimated to generate some 500 000 additional jobs. Consequently, although output declined through the 1970s the number of copper industry workers rose from 48 470 to 57 750. Mean- while, the fraction of expatriates in the mine workforce declined from one-tenth to one-twentieth, partly on account of Zambianization but also because of deteriorating conditions of service. There were not enough trained Zambians to take over from the expatriates and other firms poached workers trained by ZCCM so that the quality of ZCCM management weakened.

The flexibility of ZCCM adjustment to marketing conditions was further reduced by its product strategy. Viterbo and Wallard compared ZCCM with Phelps-Dodge, the large US producer.23 Phelps-Dodge closed its own least profitable mines when prices fell and substituted cheap ore from unintegrated firms. It took advantage of its vertically integrated structure to maintain the output and profitability of its downstream operations. In those mines which it continued to operate, Phelps-Dodge used temporary lay offs and conservative rehiring to achieve rapid cost savings.

ZCCM followed no such strategy: its marginal mines were labour intensive and underground, with technical as well as socioeconomic obstacles hindering their temporary closure. Such mines are quickly inundated with water and costly or even impossible to reopen. More-



Sources: M. Radetzki, State Mineral Enterprises: An Investigation into their Impact on International Mineral Markets, Resources for the Future, Washington, DC, 1985, for data for 1972-82; Ft. Gulati, impasse in Zambia: Economics and Poli- tics of Reform, EDI Development Policy Case Series, 2, World Bank, Washington, DC, 1989, for 1983-l 986; and the Financial Times, ‘Lack of foreign exchange hits Zambian copper’, 30 June 1988; ‘Zambian corporation lifts copper output’, 12 October 1988; and ‘ZCCM posts 500% increase in profits’, 27 June 1989.

a4M. Shafer, ‘Capturing the mineral multinationals: advantage or disadvantage?‘, International Organization, Vol 37, 1983, pp 93-l 19.

Source: K. Takeuchi, J.E. Strongman, S Maeda and C.S. Tan, The World Copper Industry: Ifs Changing Structure and Future Prospects, World Bank Commodity Working Paper 15, World Bank, Washington, DC, 1987, pp 60 and 77.

a Direct cash operating costs, including mining, refining, freight and marketing. ’ Administrative and corporate overheads, royal- ties, research and exploration. ‘All interest expenses. d Revenue from byproducts. e Representing 80% of global production.

Table 5. ZCCM financial performance.

1972 1973 1974

1975 1976 1977

1978 1979 1980

1981 1982 1983 1984

1985 1986 1987 1988 1989

output (million tonnes)

0.701 0.683 0.710

0.648 0.712 0.659

0.654 0.584 0.611

0.568 0.581 0.563 0.532

0.544 0.514 0.523 0.473 0.416

Sales Net profit ($ billion) ($ billion)

0.755 0.164 0.936 0.204 1.493 0.452

1.161 0.141 0.859 (0.006) 1.028 0.029

0.807 (0.026) 1.116 0.113 1.329 0.172

1.312 0.068 1.061 (0.189) 0.866 (0.128) 0.723 0.001

0.760 0.001 0.681 (0.008) 0.850 (0.068) 1.439 0.045

Net profit as % of assets

19 19 37

(i.31,

(g

10

(1:;

0

(Z.2,

over, ZCCM mine closure would have resulted in the immediate loss of downstream customers, whereas the vertically integrated Phelps-Dodge carried no such risk. Even so, Viterbo and Wallard estimate that tactical closure would have cut ZCCM’s average costs by one-tenth.

Shafer notes that increased state ownership, in addition to constrain- ing management, also weakens the ability to finance investment.24 From 1975 the mines began skimping on maintenance, partly to contain losses (Table 5) and partly in response to inadequate foreign exchange allocations from the Bank of Zambia. These measures, in combination with devaluation in the mid-1970s, maintained costs in current terms until 1980 when output fell and costs jumped to around 70% above the global mean (Table 6). The 1983 devaluation restored costs to more competitive levels but the Zambian government persisted in underfund- ing ZCCM by the reform of mineral taxation in order to syphon off the windfall expected from the devaluation.

Post-1983 rehabilitation efforts

Some degree of privatization might have provided the capital with which to reduce ZCCM debt and boost investment. However, the government rejected a $2 billion privatization scheme for fear of large-scale redundancies among the 60 000 workforce. Instead, it implemented a $300 million rehabilitation scheme, backed by the World Bank, the African Development Bank and the EEC. Yet financial corrosion continued during the rehabilitation drive because of the government’s tax policy.

The new windfall tax rate of 68% netted very little because of accumulated allowances, so the government levied a mineral export tax at 8% on total revenues in 1983, rising to 13% in 1985. By 1986 the tax provided one-quarter of government revenues but penalized ZCCM

Table 6. Competitiveness of Zambian copper mining 1975-85 (US@lb).

1975 1980 1984 1985

Direct Indirect cost= COSP

52.6 7.9 72.6 16.8 53.3 13.0 46.3 13.0

Interest

2.7 4.0 7.5 6.5

Gross Co/byproduct Net costc COSP

% industry cost averagee

63.2 1.6 61.6 126.0 93.4 9.1 84.3 168.9 74.8 7.8 67.0 118.2 65.8 10.0 55.8 110.3



25Financia/ Times, ‘Zambia tightening its belt’, 10 April 1986; ‘Zambia’s copperbelt on last notch’, 30 April 1987. 26World Bank, Zambia Country Economic Memorandum: Economic Reforms and Development Prospects, Report 635%ZA, World Bank, Washington, DC, 1986. 27financia/ Times, ‘Zambia faces economic crunch’, 2 December 1985. ‘%. Dewar and V. Seshamani, ‘Industrial policy issues’, in H. O’Neill et a/, eds, Transforming a Single Product Economy: Examination of First Stage of Zambia’s Reform Program 198246, Economic De- velopment Institute, World Bank, Washing- ton, DC, 1987, pp 106-l 60.

180

because it was unrelated to profitability and efficiency. Foreign exchange rationing also adversely affected ZCCM and by the mid-1980s it was receiving barely two-thirds of its annual $350 million foreign exchange needs.25 Since half of ZCCM’s foreign exchange needs went on debt service, the shortage fell heavily on imported inputs like ore trucks and refinery machinery.26

ZCCM’s five-year plan for the period 1983-88 called for the closure of the oldest mine and four processing plants, and the mothballing of three other mines. The workforce was to decline 18% by 1988, primarily through natural wastage and early retirement. Several subsidiaries largely unconnected to the mining operation, but competing for foreign exchange, were to be spun off into a separate concern. Finally, some decentralization of decision making was to be implemented. In addition, gains were expected from the start up of the third phase of the $250 million Nchanga tailings leach plant. This was intended to add 50 000 tonnes per year of low cost copper output to the total. However, unexpected technical problems caused delays.

Higher prices restored profitability in 1988 and 1989, but since production declined the rise was not on a scale to match the profits of ZCCM’s competitors. Moreover, further decline seemed inevitable through the early 1990s when the Ndola deep mine was to close without replacement. Production was expected to drop a further third through the 199Os, but the process of diversification into competitive agriculture and manufacturing had barely begun, even though it had been targeted since independence.

Unhealthy structural change

The massive real decline in Zambian per capita income (Table 2) reflects slow GDP growth as well as the real depreciation of the exchange rate. Zambia, like Chile, which also experienced a sharp fall in per capita GDP, found it difficult to expand agriculture in line with the Syrquin and Chenery norms. Zambia achieved an expansion of just 1.6% of GDP in 1972-88, barely half that of Chile and well short of compensating for the 12.9% contraction in the share of mining (Table 3). Moreover, in sharp contrast to Chile, Zambian agriculture made scant progress in exports markets. Yet, although Zambian manufacturing almost doubled its share of GDP to 24.8%, excessive levels of protection overstated both the size of the sector and its capacity to generate foreign exchange and taxes to substitute for mining.

Overprotected manufacturing

The expansion of manufacturing’s share in GDP shown in Table 3 reflects price effects rather than sectoral dynamism. After growing strongly through the first decade of independence, real manufacturing output stagnated through the next decade and grew at a modest 3.4% through the reform period of 1984-88. The sector’s high import dependence rendered it vulnerable to foreign exchange shortages. Capacity use levels were severely depressed, falling to two-thirds in 1981 and as low as 30% by the mid-1980s,27 when only textiles and clothing operated at higher production volumes than a decade earlier.28

The manufacturing sector’s weakness reflected persistently high levels of protection and state intervention. The effective rate of protection on


“1. Karmiloff, ‘Zambia’, in R.C. Riddell, ed, Manufacturing Africa, James Currey, Lon- don, 1990, pp 297-336. “World Bank, World Development Report 1983, World Bank, Washington, DC, 1983, p 75. 3’Op tit, Ref 11. 32K. Good, ‘Systemic agricultural mismanagement: the 1985 “bumper” harvest in Zambia’, Journal of Modern African Stu- dies, Vol 24, 1986, pp 257-284. 330p tit, Ref 10.


manufactured goods in the mid-1970s averaged 150%, a remarkably high level, with capital and intermediate goods generally below the average and consumer goods well above.29 The deterioration in competitiveness after the 1974 copper price shock led to increasing use of quotas which further served to postpone adjustment. By the 1980s only wood products and food products had domestic resource costs which indicated potential global competitiveness. Zambian producers of consumer durables goods and heavy intermediates had domestic resource costs around three times world levels.

Manufacturing was also undermined by the expansion of low autonomy SOEs to account for 55% of production. Price controls, investment licensing and negative real interest rates favoured large capital intensive production units. As the economy weakened the SOEs faced mounting problems of excess capacity, overmanning, inefficient management, restrictive pricing and inadequate cash flow. The net claims on the budget of non-financial SOEs, which were equivalent to 5% of GDP in 1966-69, doubled to 10% by 1978-80. 3o The liberalization after 1982 reduced SOE losses, provided capable parastatal managers were given free rein in setting prices and hiring workers.

However, along with the more efficient use of existing plant new investment was required which was deterred by uncertainty over long-term macroeconomic policy. Foreign exchange shortages, rising inflation and difficult market access made for daunting prospects for export oriented manufacturing. As a landlocked country with deteriorating infrastructure the most hopeful immediate manufacturing opportunities for Zambia lay in greater participation in regional markets. Zambia’s comparative advantage lay in the processing of non- metallic minerals, metals and food. Agriculture, especially the peasant subsector which still employed the majority of the workforce in the 1980s offered more immediate growth prospects.

Reversing agricultural neglect

The early post-independence failure to stimulate peasant farming through cooperatives was followed by relative neglect. Instead, government attention shifted to mechanized settlement schemes in the fertile south-western plateau, even though returns were low or negative.31 Far from making up the foreign exchange deficiency when copper prices fell in the mid-1970s farm exports remained negligible while Zambian dependence on imported food actually increased. Since the natural resource base was favourable, government policy was primarily responsible for the poor agricultural performance.32 In addition to the macroeconomic deficiencies, micro policy reflected urban bias and intervention was invariably counterproductive.

A wedge was driven by government subsidies between comparative advantage and the actual pattern of production. The government emphasized maize at the expense of other crops. This reflected a misguided effort to spread the green revolution through Zambia. Yet the heavily leached acidic soils in the northern part of the country are unsuitable for maize. Millet, sorghum, cassava, sweet potato and beans were better adapted but neglected.33 The maize pricing policy, like that for fertilizer, absorbed large subsidies: prices were based on production costs plus a ‘reasonable’ return which pushed them significantly above the retail price.

A second mistaken intervention concerned the uniform pricing of



fertilizer which was adopted in order to cushion against the sharp price

rises associated with the oil shocks. Retail prices of fertilizer were one-third to two-thirds of border prices. This benefited the heaviest users, who were the large commercial farmers, and imposed sizable foreign exchange demands. Total agricultural subsidies accounted for around 10% of recurrent expenditure through the 197Os, peaking at 19% in 1980 before falling sharply back.

Another inefficient subsidy to agriculture arose from parastatal organizations which distributed farm inputs and marketed produce. The parastatals lacked a clear mandate - including the need to be profitable. The distribution system was both technically and economically wasteful, especially to small farmers. Namboard, the government agency, subsi- dized remote farmers by maintaining uniform prices irrespective of accessibility. This encouraged the transport of maize to milling centres and its return to production locations, even though the cost of doing so greatly exceeded that of more labour intensive local milling. Transport costs accounted for a significant fraction of Namboard’s deficit.

The 1980s’ reforms encouraged the large commercial farmers to specialize more and more in export crops (tobacco production showed particularly good prospects) leaving food production to small farmers. Measures to remove biases towards capital and import intensive production methods included removal of subsidies on fertilizers, tractors and land rents as well as increased income tax and lower depreciation allowances. Long-term agricultural improvements were expected from measures designed to bring production methods more in line with Zambia’s comparative advantage.

Zambia’s 620 000 small farms (five-sixths subsistent) supported half the population but occupied only 30% of the cultivated area. Their extensive production methods (shifting cultivation in the north and hoe/ox ploughs in the west) encountered land shortages away from the more fertile plateau. More intensive cultivation methods were therefore required, such as leguminous crops, which did not rely on fertilizer inputs or damage the soils. Key constraints were shortages of finance, draught power and labour. The three were closely related since the supply of adequate credit to permit the purchase of draught animals would alleviate labour shortages.

Rapid agricultural expansion should alleviate food shortages, retard rural-urban drift and boost domestic purchasing power. It should underpin competitive industrialization by providing a growing domestic market. The periodic price rises of the 1980s did increase agricultural production. The agricultural growth rate rose to 2.4% annually in 1980-84, half as fast again as during the 1970s. However, since population growth rose to more than 3% per annum in the 1980s agricultural output per capita declined.

The intensification of the reforms in the mid-1980s projected an agricultural growth rate of 5% or more. Although Thomas and Weider- mann detected some improvement by the late 1980s in agricultural production which benefited the (majority) rural poor,34 the short-term cost fell on the (minority) urban poor whose incomes had declined sharply from the mid 1970s but who resisted economic pressure to leave

%G. Thomas and W. Weidermann, ‘The the city and seek rural employment. The conflict between these impact of Zambia’s economic policy reform programme in the agricultural sector’, De-

two interest groups became critical in the 1980s when the renewed

velopment Policy Review, Vol 6, 1983, pp copper price decline ruled out foreign borrowing as an adjustment

51-73. option.


Conclusion


The general lessons for mineral economies from the Zambian experience include confirmation of the speed with which an urban elite capable of blocking needed reform can become entrenched;35 testimony to the cumulative nature of economic problems and the high costs of delay; evidence of the tendency towards excessive optimism in government projections of mineral rents; and the wisdom of treating the mineral sector as a bonus with which to accelerate the competitive diversification of the non-mining tradable sector.

Zambian management of mineral dependence triggered a strongly negative feedback loop (Figure 1). This was in spite of the fact that Zambia had the potential advantage for coping with external shocks of a strong government which espoused long-term national welfare goals. Actual government behaviour conformed more closely to that of a weak regime which needed to appease rent seeking urban groups. This situation had already weakened the economy before the first shock. The adjustment policy then lagged the rate of change required and relied to a remarkable degree on foreign borrowing to adjust to the first shock.

The Zambian government was aware of the need for competitive diversification but made little progress in that direction under boom or downswing. In this regard Zambia had more in common with Peru and PNG than with Chile. During the booming post-independence decade Zambian reliance on copper increased, as diversification efforts were voided by policies which entrenched an urban labour aristocracy. The large peasant sector bore the brunt of this urban bias in terms of low and distorted farm prices. The government’s optimistic expectations towards both socialist policies and continuing high copper rents masked the reality which transferred resources to non-competitive sectors with inadequate safeguards for their use.

Meanwhile, consistent with the Caribbean nationalization model, efficiency and output in the copper sector declined throughout the downswing period and shrank faster than warranted by Zambia’s dwindling ore reserves. Yet so dire were the immediate pressures that the Zambian government further weakened ZCCM, even though Zambia’s mineral dependence index remained very high at 37. The government provided inadequate foreign exchange to the mining sector

35A.H. Gelb, J.B. Knight and R.H. Sabot, and imposed an onerous tax system which paid inadequate attention to

‘Lewis through a looking-glass: public sec- profitability. As the Zambian mines approached the end of their tor emalovment. rent-seekina and econo- oDeration. thev remained the backbone of the economv: but even so mic grbwch’, mimeo, Employkent and En- I . ’ ’

,I

terprise Policy Analysis Project, Harvard their efficiency was corroded. It would have been preferable to regard

Institute for International Development, the mines as an economic bonus with which to accelerate the competi- Cambridge, MA, 1986. tive diversification of the non-mining tradables sector.


mismanaged mineral dependence: zambia 1970–90

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