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Tuesday, 4 December 2007

The costs of reneging (Guest Blog)

Our signatories to the mines privatisation agreements were guilty of a serious oversight. Today we all recognise this and would like to correct it. But we must take great care lest, in attempting this, we commit an even greater and more costly oversight. Let me explain.

Many voices are urging that we cancel the agreements. Yes, we could do that, and the foreign investors who bought the mines would have no effective way to prevent it. If they fought us we could win. But it would be a pyrrhic victory, a battle won leading to a war lost.

For economic development depends on much more than natural resources, money and technical skills. Far more important are certain intangible factors, such as trust, the rule of law, respect for property rights, and a reputation for dependability.

Some people may argue that Africa does not yet have the trust of other peoples, so there is little or nothing to lose. But I believe that view is profoundly mistaken.

Trust is something one has to win, and today Zambia has a great opportunity to win it. How? By honouring signed agreements, instead of taking the attitude that the end justifies the means and tearing them up.

If we keep our word, varied by whatever changes can be agreed in friendly negotiation, we shall add immeasurably to Zambia's reputation as a dependable partner in development.

But to keep our word will require courage. Far easier to give in to current popular demand and forget about Zambia's international standing. That, however, would be an oversight which our children and our grandchildren could bitterly regret.

Murray Sanderson
(Guest Blogger & Kitwe Resident)

31 comments:

  1. I don't get this letter. Or Murray Sanderson.

    This is a rather crass appeal to fear.

    Most likely, the closer the government or parliament is going to get to renegotiating or scrapping the mining contracts, the more jawboning we are going to hear that everything should stay the same.

    If we keep our word, varied by whatever changes can be agreed in friendly negotiation, we shall add immeasurably to Zambia's reputation as a dependable partner in development.

    Proof? And proof Equinox, Vedanta and the likes won't be laughing all the way to the bank? And whose 'partner in development'? Will they make up for the hundreds of millions (if not billions) Zambia is losing every year. Money that is not poured into creating infrastructure, so people can keep dying on the roads?

    I'm sorry, but this is a whole lot of hot air.

    There is no substance here.

    And Cho, this is exactly the same letter that was printed in The Post.

    Murray Sanderson has a lot of explaining to do.

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  2. And another thing. The fact that these corporations make so much money from Zambia's natural resources, means that they have nearly unlimited pockets for bribing local politicians and officials.

    This is another reason why their profits should be seriously cut. Every country in the world keeps it's business center away from it's political center, for the very reason that when corporations get big, they become bigger than the government. They can bribe any official, they have armies of lawyers to stand up for them in court.

    Zambia's natural resources are it's own. They belong to the people, and the people must benefit to the maximum degree possible. That is why (ghasp) the mining companies must pay taxes like everyone else, pay above 'average' mineral royalties.

    And here is another thing. Why would mineral royalties be raised to the world average? Is Zambia an 'average' country? Or is it one of the few countries in the world that have massive, high quality copper deposits? In fact, mining companies should be paying a PREMIUM on doing business in Zambia, just for the privilege.

    Magande and Bantubonse have been bribed. Who else?

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  3. Our signatories to the mines privatisation agreements were guilty of a serious oversight.

    Oversight??? Try corruption. They were bought and paid for. Does anyone think 'advisers' under Chiluba wouldn't have taken bribes?

    It is time to stop the mining companies from benefiting from the fruits of corruption.

    They must start paying their taxes, maybe even share the profits directly through state share ownership.

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  4. I don't think anyone (except mrk of course) wants to cancel the agreements.

    On the other hand, it's perfectly reasonable to implement a windfall tax and renegotiate any contracts that were influenced by corruption.

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  5. I don't think anyone (except mrk of course) wants to cancel the agreements.

    Try: " Mining deals should be done away with - Milupi "

    Mining development agreements should be done away with instead of making any improvements to them,Luena independent member of parliament Charles Milupi has said.

    http://www.postzambia.com/post-read_article.php?articleId=34552

    So now you know different.

    There is no reason to have any development agreements at all, as they can be replaced by national (industry wide) legislation.

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  6. I think there's a clear case for renegotiating the mining contracts for two reasons:

    1) The current very high prices (and profits) copper is fetching were not envisioned at the time of signing. It is fairly obvious that market conditions then were not very favourable, a factor which the buyers used to their advantage at that time.

    2) The Zambian signatories were corrupt! Suggesting they were "guilty of serious oversight" is an understatement.

    The two 'extremes' of this argument are that a) leave things as they are and suffer the short and long term. b) Cancel the contracts, and lose trust, etc (which may be a short term effect, anyway).

    I would go for c) Renegotiate a premium price in line with the current and foreseeable market conditions.

    I also think that the current buyers would probably want to renegotiate, (even though may not admit on the face of it) because they can't possibly opt to let go when copper is such a profitable commodity.

    By the way, would be nice to hear from specialists in contract renegotiations of this scale.

    My 2 Ngwee's worth.

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  7. Nice E,

    I would also like to hear from an expert in contract law. This is what I managed to dig up. This is from Legalised.com, on what constitutes an illegal contract, at least under US or UK law.

    Mistake as to the terms of the contract

    At common law

    * Common law has held contract is void if one of the parties enters into it under a serious mistake as to the content or existence of a fundamental term, and the other party has knowledge of that mistake but nevertheless enters into the agreement on the basis of the first party’s mistake

    * Typically offer made to offeree who ‘snaps it up’

    * Objective test used to determine whether a contract has been made out – Taylor v Johnson [see p175] the consequence that a contracting party cannot rely on his or her own mistake to say that the contract was void ab initio , even if the fact in question was fundamental, and if the other party knew of the mistake

    * Contract will not be void ab initio unless

    1. Fraud or misrepresentation

    2. Mistake is as to existence or content of an actual term in a formal written contract = root of contract

    3. Equitable ground such as unconscionability


    I think a lawywer could argue that all these three points were present during the signing of these contracts.

    Certainly considering Zambia's poverty and lack of other sources of income, the fact that royalties were set at 0.6%, the lowest in the world, and that provisions were included that ensured these companies pay little or no taxes, is unconscionable.

    Fraud or misrepresentation. :) The mining companies keep making 'new discoveries' of greater and greater amounts of copper, and even uranium. If they knew in advance that they would find more than they projected... The government was assured that copper prices would never rise - just by the IMF, or by the mining companies as well? In misrepesenting the future of copper prices that way, was there collusion between the IMF and the mining companies? I am sure there must have been contacts, considering the size of these contracts. Were payments made to 'advisers' like Magande? We all know how corrupt the Chiluba government was. Even recently, he was caught taking money in the Vulture Fund saga. If debts incurred under dictatorship count as 'onerous debt', do these agreements count as 'onerous contracts' (if there is such a term)?

    Are the exemptions that prevent the mining companies from paying taxes like any other business 'onerous provisions'?

    One thing that keeps bugging me, is that if the IMF thought that copper prices would never rise, why were all these companies so eager to buy all these mines in the first place? How could their and the IMF's assessment differ so dramatically?

    I think collusions should most definitely not be ruled out.

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  8. From the same page:

    QUOTE

    Undue Influence
    Contract is not void but voidable

    Where the dominant party uses influence that she or he has over the servient party to obtain some benefit under a contract
    Allcard v Skinner (1887) 36 Ch D 145 classified the undue influence cases as instances of actual or presumed undue influence
    The question is not whether the person seeking relief understood the transaction but whether it was the result of a free exercise of the will, and it is influence, not complete dominion, that is necessary

    END QUOTE


    I think Undue Influence fits the IMF's involvement in the contracts to a T.

    They absolutely used undue influence over the government, by withholding $530 million in donor aid, after the GRZ was reluctant to privatize ZCCM. The GRZ was not exercising it's free will when it signed these agreements.

    And I think Edith Nawakwi is a very smart woman.

    If this Australian example is similar to Zambian law, these contracts could be completely illegal.

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  9. Mr. K is puzzled by my emphasis on binding commitments. He cannot believe that I consider keeping one's word a priority, let alone top priority.

    I am reminded of two sayings of Richard Whately:

    "All men wish to have truth on their side; but few to be on the side of truth."

    "Honesty is the best policy; but he who acts on that principle is not an honest man."

    Principles can indeed be confusing.

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  10. This letter struck me as a purely ideological input into the discussion - it reads effectively, 'I believe in the free market and in the sanctity of contracts, no matter how unjust. Big business, left free to pursue it's interests, will secure national development. That's it.' It shows no appreciation of the change ion context between the original negotiations and the current context. The point is, investors would be very likely to stay in Zambia, even if significantly more heavily regulated and taxed, because: 1) they've already made huge investments and they need to hang around to get tbe returns, 2) because they will still make profits even if more heavily taxed and regulated. 3) because everyone knows that a lot of countries are re-negotiating their contracts given changing circumstances, and this is perfectly normal practice. Zambia already has the reputation of being a doormat that investors can wipe their feet on as they carry their money out. Renegotiating the deals won't change this.

    The notions of market confidence and investor confidence are used by neo-liberals to put the fear of God into Governments that think of doing anything to put their people first.

    So, I wondered, who is Murray and why this interjection? All I could find on google is this - his involvement in establishing a hard-core free market think-tank... that's all the explanation I need.

    http://zippazambia.org/page.php?instructions=page&page_id=467&nav_id=

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  11. Not sure that link loaded properly - let me try again:
    http://zippazambia.org/page.php?instructions=page&page_id=467&nav_id=

    If that doesn't work, here's the key quote:

    “ZIPPA is a not-for-profit, independent, non-partisan, non-political, and non-governmental organisation, which has recently been formed to undertake research on economic and social problems, educate the public in sound economic principles and advocate economic freedom as the road to growth and prosperity.

    Economic freedom refers to the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions. The freest economies operate with a minimal level of government interference, relying upon personal choice and markets to answer basic economic questions such as what is to be produced, how it is to be produced, how much is to be produced, etc."

    So, I am sure we could have a discussion about the successes and failures of hardcore liberalisation strategies in Africa. But let's not pretend this is a discussion about the mining contracts...

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  12. Murray,

    Principles can indeed be confusing.

    They can be. So you want to talk about 'principle'.

    Ok, I suggest you start walking it like you talk it. I suggest, that from now on, instead of driving anywhere, you get about by walking next to the road (and no paved footpaths either).

    As you have a principled objection to the presence of government, you would be outraged at the concept of making use of public roads, as they have not been built by business, but by respective governments (and most likely the Socialist one of Kenneth Kaunda at that).

    That way, you also don't have to fill up with government refined petrol from the Indeni refinery, the only one in the country. Pity that 'business' didn't see fit to build more, but it won't be your concern anyway.

    Fortunately, business can be relied upon to make shoes, so your conscience will not be bothered by buying a new pair every 1000 miles or so.

    Or let me correct that. Business can be relied upon to import shoes from a low wage country with a strong government sector that will protect it's interests to the point of manipulating the national currency, called Communist China. Of course, with free trade, you will be hard pressed to find any shoes made by business in Zambia itself.

    Some Buddhist sects, including ones from China, use walking to achieve a form of enlightenment. Happy walking.

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  13. Minewatcher,

    Zambia already has the reputation of being a doormat that investors can wipe their feet on as they carry their money out.

    Which of course is not a reputation worth defending or continuing.

    So, I wondered, who is Murray and why this interjection?

    I wonder that, every time I hear someone defend these agreements.

    What I was disappointed in, is that I was looking to read practical objections to why the contracts shouldn't be renegotiated or done away with completely.

    I didn't find any (which strengthens my position), but instead read nothing but an appeal to fear of 'what might happen' and 'intangibles' as the basis for his argument.

    There are real 'tangible costs' in continuing these agreements - no investment in infrastructure, massive taxation of the workers, the creation of a ruling elite that is 'above it all' (which sets the stage for future social unrest).

    This by the way is what happens in any country that adopts neoliberal ideas, including the USA (look at their change in who is taxed and how much, the collapse of bridges and the blowing up of a century old heating system in New York that has been in the news recently, and the sinister moves toward the privatisation of army and police functions).

    Wheverever neoliberals advocate for the abolition of government, you see the degradation of infrastructure, and the concentration of wealth and power in the hands of a tiny few.

    It is not a society we should strive for.

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  14. I wonder whether the issue here is not so much the impact on existing mines, but on investment to come...minewatcher is correct in asserting that the sunk costs may well be high for existing mines to pack and go...indeed Murray accepts this as well. If I read Murray's assessment correctly, the issue for him is whether Zambia's future investment could be slightly damaged from unilateral action...
    Murray is less concerned about the mines today....

    He is more concerned on what the impact of break down of trust, lack of adherence to rule of law, might mean for future Zambia investment....

    Personally, I think the long term cost are negligible given that nearly everyone accepts that Zambia has the lowest terms of any nation...our case is perhaps much stronger, morally, than Murray assumes...

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  15. Cho,

    I wonder whether the issue here is not so much the impact on existing mines, but on investment to come...

    What the government should do is declare the mining industry a key national, strategic industry, and leave other industries alone, apart from infrastructure (if that is an industry).

    Everyone around the world will understand that Zambia's lifeblood is the mines, and that it takes profiting from this sector (as opposed to other sectors) very seriously.

    Japan has done the same with the car industry. They decided that they were going to export lots of cars, and that this was going to be crucial to their economy.

    As such, it is extremely difficult if not impossible for any company that is not Japanese to manufacture cars in Japan.

    What's the problem?

    This is how Japan protects is rice industry.

    Japan's small agricultural sector, however, is also highly subsidized and protected, with government regulations that favor small-scale cultivation instead of large-scale agriculture as practiced in North America.

    Imported rice, the most protected crop, is subject to tariffs of 490% and was restricted to a quota of only 7.2% of average rice consumption from 1968 to 1988. Imports beyond the quota are unrestricted in legal terms, but subject to a 341 yen per kilogram tariff. This tariff is now estimated at 490%, but the rate will soar to a massive 778% under new calculation rules to be introduced as part of the Doha Round.[4]


    I don't think Japan is concerned about how it will be perceived internationally, or how other rice producers will feel hard done by, by not being allowed 'their share' of the Japanese rice market.

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  16. "Economic freedom refers to the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions. The freest economies operate with a minimal level of government interference, relying upon personal choice and markets to answer basic economic questions such as what is to be produced, how it is to be produced, how much is to be produced, etc."

    A statement from ZIPPA, quoted on this blog by "minewatcher" in trying to highlight Murray's trend of thoughts.

    Well, with all due respect to the author of that statement, my view is it's either straight from an elementary Economics Text Book, or from Cuckoo Land, because it doesn't happen like that in practice. By "Freest economies", I take it he/she was referring to the West. Well, the govts of those very economies (and their wider regional bodies, such as EU), have enacted laws limiting imports from China! You may recall the so called "Bra wars" this time last year when a ship carrying clothing from China to the EU was stopped from offloading because of quota limits on imports from that country. Protectionism is rife in the West and anyone who believes in these ultra-liberal economic strategies is dreaming.

    Apologies for the digression but the point does have a bearing on the topic at hand as the statement in question exposes the real intentions of the original author.

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  17. Nice E,

    Well, with all due respect to the author of that statement, my view is it's either straight from an elementary Economics Text Book, or from Cuckoo Land, because it doesn't happen like that in practice.

    Welcome to Free Market Economic theory. Their Believers are never deterred about the fact that no economy has ever been built that way.

    They are also oblivious to the fact that most of the countries in northern Europe have all kinds of protections and ensurances for it's population - mandatory education free of charge, universal healthcare coverage. Public roads and libraries.

    If they introduced 'free markets', and withdrew all government support, their economies and societies would collapse, and poverty and unemployment would shoot up, and wealth would be concentrated in the hands of the corportate elites. This happened in Chile, Russia, Mexico, and is happening in the US.

    Free Market theory is dead.

    Nobody wants to live in that kind of society, which means it can only be imposed under a dictatorship.

    Protectionism is rife in the West and anyone who believes in these ultra-liberal economic strategies is dreaming.

    There is no successful economy that isn't practicing protectionism - or they forfeit their manufacturing industry, like the US has done.

    Japan, Korea, they all have massive government involvement in banking, manufacturing and other economic sectors.

    Check out the history of the Keiretsu and Chaebol.

    If anything, the government should be considering that kind of vertical integration of economic sectors.

    But I would be happy if just the mining sector was protected properly, and that the government was benefiting to the max.

    And remember Equinox's profit margin is 60% of turnover. If we had 50% of profits, and the remaining 40% of costs were all spent in the Zambian economy, we would be looking at a completely different economy.

    We would also see a complete revaluation of the Kwatcha, to something closer to the 113 Kwacha to the dollar when the MMD came in, instead of the present 40,000 Kwacha to dollar

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  18. I'm glad that my letter to The Post , "Cost of cancelling agreements", has sparked a lively debate, or is 'onslaught' the word?

    My sole aim was to point out the effect that abrogating agreements can have on our country's reputation with prospective investors. I don't think that has been answered on the blog. If Zambian's earn a name for being masters at finding reasons for ditching agreements, that will be a major handicap. And in today's world few countries can develop on their own.

    The term 'intangible wealth' was taken from a recent article, 'The Secrets of Intangible Wealth', by Ronald Bailey in Reason Magazine. This is based on a World Bank study which found that a country's wealth depends almost entirely on intangibles like institutions, property rights, skills and trust, rather than on land and raw materials.

    Back to mines privatisation. Mr. K says what "keeps bugging" him is "why were all these companies so eager to buy all these mines in the first place". They weren't.
    The Kafue Consortium withdrew when they found they couldn't trust Chiluba's negotiating team. Then Anglo, after moving in, found things so unattractive that they pulled out! How come, if the prospects looked wonderful? Retrospective wisdom is easy.

    The debate then moved from mining to markets. Mr. K praises Japan for protecting its rice growers and car manufacturers, and adds, "there is no successful economy that isn't practising protectionism". How about Hong Kong, which was built on free trade and has never had any tariffs? And now there's China itself, and virtually all developed countries. Most of them have reduced duties greatly in the last 20 years, and have far lower tariffs than third world countries.

    Agreed, the US and EU are inconsistent enough to protect and subsidize their farmers. But politicians everywhere kowtow to lobbies of producers, which are far better organized than consumers, most of whom don't even realize how hard the resulting duties and subsidies hit their pockets.

    Mr. K's prize statement is "Free Market theory is dead. Nobody wants to live in that kind of society, which means it can only be imposed under a dictatorship." So economic freedom has to be imposed by dictators!! The fact is, of course, that it is only through free markets that we get the competition and innovation which have made the countries which adopted this 'dead' theory incredibly wealthy. The price controls which fly in the face of free markets have to be imposed by the likes of Mugabe.

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  19. May I offer some more thoughts on protection and protectionism?

    Protectionism is static, timid, defensive, negative: 'What I have I hold'. It opposes competition, change, innovation, development.

    Protection does not even benefit the businesses which want to be shielded by it, for it encourages them to sit back and stagnate. By 'protecting' them against competition, it removes the beneficial influences of new ideas, new technology, better methods, higher quality, lower prices.

    Protectionism defends the past. Economic freedom (involving the free markets which protectionists fear and hate) promotes the future.

    What Zambia needs is not protectionists but entrepreneurs.

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  20. Murray,

    I'm glad that my letter to The Post , "Cost of cancelling agreements", has sparked a lively debate, or is 'onslaught' the word?

    The problem was that your letter didnt' cite any concrete examples of why any of it's assertians were true, let alone inevitable in the case of Zambia.

    If it had, at least we could examine those and see whether they hold up.

    Unlike the the issue of 'free markets' - of which there are many concrete examples.

    I always try to be open to new information (which takes effort). So, if you're arguing that Zambia should not receive hundreds of millions (billions over the years) of dollars because of 'reputation', I would like to see some concrete examples cited as to why that would be a good idea. Or where the money for development is supposed to come from instead. In the mean while, I'll take the money any second of the day.

    Instead, the letter seemed intended to scare people with vagueries.

    The Kafue Consortium withdrew when they found they couldn't trust Chiluba's negotiating team. Then Anglo, after moving in, found things so unattractive that they pulled out! How come, if the prospects looked wonderful? Retrospective wisdom is easy.

    Vedanta liked what they saw. So did Equinox. And I have had no explanation from any quarters why the government simply couldn't have closed down those mines that were unprofitable until a later date. Apart of course from the fact that the IMF disagreed.

    The debate then moved from mining to markets. Mr. K praises Japan for protecting its rice growers and car manufacturers, and adds, "there is no successful economy that isn't practising protectionism". How about Hong Kong, which was built on free trade and has never had any tariffs?

    Ok. Hong Kong is not a country, it is a city state. As is Singapore.

    As such, they do not have the opportunities or problems real countries have.

    For instance, their plus is that as cities, distances are very small. As a result, they do not need to develop thousands of miles of infrastructure. They have no remote rural areas that need to be included in national development. Also as a result, they can focus on their universities and colleges, and citywide transport systems to get people around. Technology can be introduced very quickly.

    As cities, they need to import most of their food. This means that they need foreign currency, just to meet their needs for food and energy.

    As a result, they are very much positioned to import raw materials, turn those into finished products, and then export them all across the world. They can use their college graduates to set up hi-tech and services companies.

    This is not Zambia. It is also not even Japan, China or India.

    Just because Singapore and Hong Kong benefit from manufacturing to the point of having relatively free trade, doesn't mean countries that are not city states, or are not very small like Malaysia, can do too.

    Contrast Japan.

    Japan has massive government support and interaction with their corporations. Their Zaibatsu and later Keiretsu always worked hand in hand with the state. Their economy is extremely protected. I mentioned the rice sector. I could also have mentioned the car industry. No one who is not Japanese can easily set up a manufacturing plant in Japan. As a result, their cars are everywhere. They make a lot of money from it. And it is not a free market. And did I mention that all the little companies that supply parts to the Keiretsu are Japanese? They only import goods when they absolutely cannot manufacture them themselves. Roughly the same can be said of Korea.

    China.

    The Chinese are consciously manipulating their currency, keeping it's exchange rate very low, just to stimulate exports of their goods. As a result, they own a huge amount of the US's debt.

    What is important to remember, is that these policies are not based on ideology, but on pragmatism. They consciously looked at what would make their individual economies thrive, and introducing free markets was not part of it.

    If the Japanese were running Zambia, they would never, ever, give up the mines. They would be protecting it from any foreign ownership, and start building entire industries around them.

    And let's not forget. Free Market theory was imposed on Zambia by it's lending institutions.


    Mr. K's prize statement is "Free Market theory is dead. Nobody wants to live in that kind of society, which means it can only be imposed under a dictatorship." So economic freedom has to be imposed by dictators!!

    Yes. Augusto Pinochet comes to mind. Chile was the first country where (neoliberal) free market theory was introduced. In fact, all over South America, where there are free elections, as soon as the people get a choice, they vote out of office anyone who is even remotely connected to the highly economically destructive 'structural adjustment' policies.

    I suggest checking out the documentary Life And Debt, on the destructive effect on Jamaica's economy of 'free trade'.

    http://video.google.nl/videoplay?docid=-5277094596195828118

    And the similarities to events in Zambia are remarkable.

    1) The country is forced to open up it's economy, not because it is thought to be the best course of action, but because the neoliberals at the IMF or World Bank tell them to.

    2) The country creates 'free trade zones', where foreign companies can come in and not be subject to the country's legislation on taxation, labour or environmental laws. This is rationalized in that although they add nothing to the national koffers, at least they 'create jobs'.

    3) The workers rebel against the minimal wages and terrible working conditions. Chinese workers are flown in, instead, defeating the last economic excuse for having FDI in the first place - creating jobs.

    4) Heavily subsidized American foodstuffs are imported, creating false competition, and driving local farmers out of business. The same is true for any existing local manufacturers, which now have to compete with extremely cheap (and often shoddy) Chinese products.

    And that is just a small island like Jamaica, which at least has some tourism going on. But the same is true in Argentina, Chile, Brazil, Peru, Bolivia.

    And to put the icing on the cake, after all the support for the Contras, all the deaths... old time communist Sandinista, Daniel Ortega was democratically re-elected in Nicaragua.

    So yes, Free Market theory, neoliberalism, is dead. The re-election of Daniel Ortega just makes it official. :)

    The fact is, of course, that it is only through free markets that we get the competition and innovation which have made the countries which adopted this 'dead' theory incredibly wealthy.

    I have to take severe issue with that. Here is my take on that.

    We should make a clear separation between 'free competition' and 'free markets'.

    Free markets are unregulated markets, where anyone can do whatever they want to make a profit and destroy the competition. Inevitably, this leads to cartel formation, price fixing, and ultimately monopoly creation. In other words, free markets ring in the end of free competion, and therefore the need for innovation (which after all costs effort and money) and consumer choice. (Concrete examples: Windoze, Walmart).

    Free competition on the other hand is the competion between companies. This can only happen in regulated markets, for the reasons cited above. Without anti-monopolistic regulations, prohibitions againts cartel formation, one company becomes dominant, and has enough economic clout to make doing business for small competitors impossible.

    A company like Walmart can make the conscious decision to make a loss in a small town for years, just to drive the competition out of business and increase market share. They make up the (temporary) loss by making a profit in all their other markets.

    What is the first thing a fund manager looks at when looking into whether a company is going to make him a lot of money? Does it have competition? If so, they are going to have to do a lot of things that are going to cost the business money - invest in research, engage in price wars, and there is always the possibility that this particular company could lose out to it's competitors. On the other hand, if they have no competition, they set their prices as high as the customers an afford. Innovation is just a waste of money, as they have a captive audience.

    A prime example of that would be Microsoft. It owns 90% of all operating systems running on PCs around the world. It is a very difficult market to break into once someone has set the standard, because of compatability issues between the Operating System and applications. As a result, Microsoft as a norm brings to market shoddy products, that need to be made workable with later updates. (Every OS since at least Windows 98 has had Second Editions or Service Pack 2's and the likes.) The reason is that doing extensive testing is expensive; that their monopoly would end if they made their OS's 'open architecture' instead of proprietary software. They innovate by taking the inventions of other companies. Windows was an Apple invention. Tabbed Browsing and Password Management were only introduced in IE 7, while they have been available for 5 long years from Netscape Navigator. Etc. And in doing so, they simply make the inventing company's product less relevant, and the company itself obsolete.

    But this is what happens when a large monopolistic company has no real competition in it's core business.

    Businesses do not like competition. They like destroying the competition and being the only company in a market segment.

    This is why Free Markets are just a snapshot, a moment frozen in time. A free market is a market on it's way to monopolisation.

    And that is why free competition is not a natural state, but something that must be protected by legislation. As a result, there can be no such thing as free markets (unregulated markets), at least for very long.

    What Zambia needs is not protectionists but entrepreneurs.

    What Zambia needs is free competition between (Zambian) companies, not markets that are open to anyone and that do not protect free competition. What Zambia needs is protected entrepreneurs.

    There is nothing wrong with protecting Zambian companies, as long as there are lots of them.

    That is what the government should be looking at - stimulating hundreds of thousands of Zambian SMEs.

    It would solve unemployment, and increase average incomes.


    Here is a short overview of the Keiretsu concept:
    http://www.staffs.ac.uk/schools/business/bscourse/jbe/s7.htm

    And everyone, check out Life And Debt, by Stephanie Black, narrated by Jamaica Kincaid. (Available free at google here.)

    http://video.google.com/videoplay?docid=-5277094596195828118

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  21. I will leave it to our readers to judge between the points made by Mr. K and myself.

    I would just conclude with two points:

    1. Japan. Its economy has been stagnant for the past ten years, and Toyota now makes most of its cars abroad. The Economist recently reported that Japan wants to attract foreign investors with new ideas.

    2. It is inconsistent to dismiss Hong Kong, and then hold up Jamaica as a counter example

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  22. Murray,

    1. Japan. Its economy has been stagnant for the past ten years, and Toyota now makes most of its cars abroad. The Economist recently reported that Japan wants to attract foreign investors with new ideas.

    Japan was the first developing country to industrialize, and it did so even before WWII.

    Japan is now the second largest economy in the world by GDP, after only the USA, and before Germany, China, the UK, France and Italy.

    At $4.5 tillion (US), I don't see how anyone can dismiss it as an example.

    2. It is inconsistent to dismiss Hong Kong, and then hold up Jamaica as a counter example

    Not really. Jamaica, unlike Singapore, has some space for growing food. It had an agricultural sector, including a dairy sector.

    And another thing that hasn't been mentioned. As much as we like democracy - Singapore, South Korea, China - they aren't exemplary democracies.

    Democracy, good governance and 'reputation' are not what set successful economies apart. What sets them apart is that they keep most of the money they make. They protect and support their industries. And they don't make apologies for it either.

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  23. Folks,

    Two points:

    1) Free-market and protectionism are usually applied to different market segments, in the same country. Therefore, it's not quite right to say one country is a free market and another is protectionist.

    2) The basic rules of demand and supply are very much (or should be) at the core of any deal negotiations no matter the size. Therefore, caveats should have been placed for either party in the mining deals to renegotiate contracts to reflect the shift in the demand/supply balance.

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  24. Zedian,

    1) Free-market and protectionism are usually applied to different market segments, in the same country. Therefore, it's not quite right to say one country is a free market and another is protectionist.

    In fact most capitalist countries in Europe are also social-democratic. They have very strong economies, but they also have subsidies for specific sectors, and social protections.

    Free markets of the absolute, neoliberal variety are a kind of utopian ideal.

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  25. Hi,
    Interesting. We're into the meat of this discussion now.

    I admit I am torn on the question: what should African Governments do to secure investment and protect the interests of their people at the same time. Clearly we do live in a capitalist world. There is a race to tbe bottom. It's miserable, and the best answer is for developing countries to gang together to challenge the 'free-market' pricing of commodities that leaves them so vulnerable to massive swings. Given the ability of Western powers to source elsewhere and break most producer cartels thus far established, in the meantime, what to do?

    I don't think we will solve this one on the basis of ideology, which sadly is what's driving Murray's line of thinking.

    The fact that the Bank falls back on a concept like 'intangibles' suggest how lost and wandering the argument for neo-liberalism has become. If you don't have a clue how to explain the practical failure of your theories and prescriptions over an extended period, blame someone else, or maybe something else - intangibles?! Pathetic. Can we not deal with concretes? Can we answer questions like: historically, have coutries that have imposed windfall taxes suffered from disinvestment? Take the case of the UK under New Labour if you like. My suspicion is the answer is no.

    Can we make a comparison of levels of investment in extractive industries in Africa with what World Bank thinking suggests are measurable 'levels of policy environment' - have a look at the Bank's CPIA if you like, it's a bad joke, but it's an attempt to 'measure'.

    Is it possible that the inverse of the 'resource curse' theory is that (save Botswana which is always the outlier in Africa-wide comparison) many African countries that have attracted the highest levels of investment in resource extraction have questionable 'investment climates': Sudan, Angola, Nigeria, Sierra Leone, DRC. Why? Because they have natural resources that promise a return on capital invested.

    Certain strands of it will go into war-torn jungles where they need private militias to protect their 'investments' if they think they can get their hands on valuable resources.... the 'entrepreneurial spirit' is alive... How do the 'intangibles' feel there?

    On the other hand, there clearly is a lack of investment in Africa - and particularly in countries like Zambia that have bent over backwards to attract it. We can ask, is capital unduly 'nervous' or as Daniel Ben-Ami has it 'cowardly'. ( http://www.amazon.co.uk/Cowardly-Capitalism-Global-Financial-Casino/dp/0471899631/ref=sr_1_1?ie=UTF8&s=books&qid=1197647422&sr=8-1)

    Returns on investment in Africa are well known to be higher than any other region of the world. And yet investment remains stubbornly low. capitalists in other words are irrationally nervous of the continent. This has likely more to do with racism, ignorance and the 'culture of fear' in the West than a rational assessment of the chances of making a return on investment, or any measurement of the policy environment in any particular country.

    An interesting aspect of this debate is the way that Chinese investment is actually generally not arriving in 'dictatorships', but (partly because Chinese firms are not actually competitive with Western firms for the lowest hanging fruits) in the places where Western capital is too scared to tread. Chinese investment is now, to some extent, serving as an example for the West, which is now starting to chase Africa harder, fearing the Chinese are onto something.
    http://www.spiked-online.com/index.php?/site/article/4145/

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  26. Alastair,

    I don't think we will solve this one on the basis of ideology, which sadly is what's driving Murray's line of thinking.

    The fact that the Bank falls back on a concept like 'intangibles' suggest how lost and wandering the argument for neo-liberalism has become. If you don't have a clue how to explain the practical failure of your theories and prescriptions over an extended period, blame someone else, or maybe something else - intangibles?! Pathetic.


    Absolutely. :) It is like saying - well I just ran out of ideas on why we shouldn't renegotiate the mining contracts. Which is a kind of victory.

    And is Murray's line the World Bank's line? It would be interesting to hear that argument made in their own words.

    And with the failure to create a perfect neoliberal state in Iraq, neoliberalism has failed. The whole Chicago School has become suspect, and is being rejected peacefully and democratically all over South and Central America. I still can't get over Daniel Ortega being democratically elected.

    I admit I am torn on the question: what should African Governments do to secure investment and protect the interests of their people at the same time. Clearly we do live in a capitalist world. There is a race to tbe bottom. It's miserable, and the best answer is for developing countries to gang together to challenge the 'free-market' pricing of commodities that leaves them so vulnerable to massive swings. Given the ability of Western powers to source elsewhere and break most producer cartels thus far established, in the meantime, what to do?

    I believe that there are many different forms of 'capitalism', just as there are many political forms of socialism or fascism.

    We have seen the corporatist version from the neoliberals, and all the institutions they serve on.

    However, it is time for SME centered capitalism. If the government built up all the marketeers and subsistence farmers in the country and helped at least 10% of either become medium sized businesses and commercial farms, it would be a completely different economy.

    You would have people with real disposable incomes, which means they can afford services, which would create a demand for teachers, lawyers and all kinds of professionals.

    If every farmer had 100 hectares, and they used only 50 of those to grow maize, they could grow 100 tonnes (2 per hectare) of maize, which if sold at $200 per tonne, would create a turnover of $20,000. If half of that was cost, they would earn $10,000 per year before tax. And they could use the other half for commercial crops, or livestock.

    They could make use of sustainable agriculture techniques. It could be the basis of a whole new, ecologically sound and sustainable agricultural industry in Zambia and Africa.

    Zambia has the land, the water, and the unemployed to make that happen.

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  27. A very good analysis from Alistair Fraser and follow-up from MrK. Hear hear!

    Given the ability of Western powers to source elsewhere and break most producer cartels thus far established, in the meantime, what to do?

    A very important question, with no easy answers. However, analysing how the so called "emerging markets" of the Far East, namely India and China, have come to be what they are today may offer some clues. Their transformation is happening now and it's the subject of many business topics out there. How are they doing it? should be our question.

    An interesting development happened a couple of years or so ago. The Chinese came to Britain to snap up the remnants of its once prestigious car industry, Rover. The company was in bad shape and in desperate need of cash, so much so that they agreed to even take negotiations to China when the Chinese dangled a bunch of cash in front of Rover.

    The Chinese took advantage (obviously), and according to Rover's chief designer, they used 'undocumented' negotiating techniques. Apparently, the Chinese offered the Rover delegation some 'light' entertainment initially, (read that as booze and women). And then they followed it up with serious business negotiations.

    Well, we saw the result. Rover was sold for a song, (or is it a beer?)

    Two things I've picked up from this:
    1) You don't want to be desperate in a Capitalist world because it's cruel.
    2) China has emerged to be an economic force to reckon with and we should really be interested in how they did. (we should also be wary of those techniques used on Rover). I wonder, have they already done it to the Zambians over the mines negotiations?

    Now to the IMF/World Banks. To be fair to them, I've heard that some of their officials in Africa actually complain that one of the problems they face there is that (most) Africans expect to be told what to do! At the risk of sounding controversial here, I actually think that is true. There is evidently a "yes bwana" (yes master) culture in Africa which some could attribute to the colonial days. However, the colonial days are long gone, move on!

    This retrogressive culture is partly to blame for people choosing to ignore local experts in preference to the advice from World Bank officials who are detached from the problems they've been tasked to solve. The result is neoliberalism in a culture that can't support it.

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  28. Alastair,

    Certain strands of it will go into war-torn jungles where they need private militias to protect their 'investments' if they think they can get their hands on valuable resources.... the 'entrepreneurial spirit' is alive... How do the 'intangibles' feel there?

    I think there is a certain lack of professionalism in the 'argument' from the World Bank. Even in the BBC interview, the interviewer was blown away by the representative's statement that IMF involvement in the agreements was all 'water under the bridge'.

    Notoriously, the World Bank and IMF are unaccountable and undemocratic. I wonder if they are also taken a leaf from the brazenness of the Bush Administration and it's dealing with the public.

    And if you look at Shell, can't be beaten away with a stick, even though their own employees get kidnapped by rebels in Nigeria. And doing business with a military dictatorship, which killed activists who objected.

    I guess paying taxes could be the last straw though. ;)

    Chinese investment is now, to some extent, serving as an example for the West, which is now starting to chase Africa harder, fearing the Chinese are onto something.

    I think it is clear that the Chinese have upset the cozy relationships that western corporations have built with many African governments. I think that is very clear in the case of Zimbabwe, where the Chinese are practically bailing out ZANU-PF. The West's level of control over African countries is slipping.

    What is needed in the short and long term, is African countries standing up for their own rights, perhaps playing East and West off agasinst eachother, but only doing so in their own interests - which is the interest of their own populations. I think civil society has a big role to play in that, and there should be a greater division of the powers of state and independence for the civil service.

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  29. Very interesting discussion!

    A couple of thoughts focusing on specific contributions.

    ”Can we not deal with concretes? Can we answer questions like: historically, have coutries that have imposed windfall taxes suffered from disinvestment? Take the case of the UK under New Labour if you like. My suspicion is the answer is no. “ - Alastair

    I agree there’s a genuine empirical question of what the impact on investment is for nations with “high” windfall taxes. The question is empirical because clearly there are significant institutional differences between Zambia and other countries. The macroeconomic conditions may also be different. In general, my view is that there are two separate issues here. Does Zambia have a windfall tax or not? If yes, how high should it be? I think we all agree that it does, but there is confusion on how “high” the tax should be? Very little discussion has taken place in this. We wait to see what Magande has in mind for his “optimal” tax proposals for 2008.

    ”Returns on investment in Africa are well known to be higher than any other region of the world. And yet investment remains stubbornly low. capitalists in other words are irrationally nervous of the continent. This has likely more to do with racism, ignorance and the 'culture of fear' in the West than a rational assessment of the chances of making a return on investment, or any measurement of the policy environment in any particular country.” - Alastair

    I am not sure I agree that it’s an irrational approach. I believe the reasons may well be two fold - contagion and information. Zambia is for example relatively stable but clearly its surrounded by bad neighbours. In the words of Paul Collier it suffers from a “landlocked trap”, among other traps! What happens in DRC, Zimbabwe and other unstable neighbours affects us just as much. It’s a frustrating position to be in. The other point is information – to some extent “ignorance” and the “culture of fear” are all symptoms of poor information about the people of Africa and the investment opportunities that exist. There’s much African governments can do to overcome this, rather than blaming Western companies or World Bank.

    ”An interesting aspect of this debate is the way that Chinese investment is actually generally not arriving in 'dictatorships', but (partly because Chinese firms are not actually competitive with Western firms for the lowest hanging fruits) in the places where Western capital is too scared to tread.” - Alastair

    I struggled to reconcile this statement with your earlier suggestion that Western capitalists are acting irrational? Could the reason be that the Chinese are backing investment with “military might”? Indeed your earlier comment hints on this as well ”Certain strands of it will go into war-torn jungles where they need private militias to protect their 'investments' if they think they can get their hands on valuable resources.... “ The truth is that certain parts of Africa are unsafe and the reason the Chinese are there is because they can guarantee those investments with force. It is possible western nations feel uncomfortable adopting that approach and hence prefer to simply invest less.


    ”Two things I've picked up from this:
    1) You don't want to be desperate in a Capitalist world because it's cruel.
    2) China has emerged to be an economic force to reckon with and we should really be interested in how they did. (we should also be wary of those techniques used on Rover). I wonder, have they already done it to the Zambians over the mines negotiations?”
    - Zedian

    I agree that there’s much to learn from China, especially the industrial policy – if we take the car industry as an example, three important steps have suggested have made the Chinese successful.

    First, the government required foreign companies to enter into joint ventures with local enterprises, ensuring the transfer of technological capacities.

    Second, domestic content requirements compelled vehicle manufacturers to source more of their inputs domestically than they would have chosen to do at the outset. Economists normally think this is a terrible policy because it breeds inefficient domestic suppliers. (Such requirements are also now banned by the WTO). But this has evidently not happened in China (and also in India), where first-tier suppliers have reached near-frontier levels of productivity. John Sutton (LSE), who has analyzed the auto industry in China and India in detail, credits in part the domestic content requirements for this achievement.

    Finally, state-owned enterprises have been a breeding ground for private entrepreneurs.

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  30. The cost of the windfall tax should be as high as the market will bare. Copper is relatively cheap because Zambia sells it cheap.
    It is a crucial and short supply commodity and Zambia should take full advantage of this fact. Zambia does not owe the rest of the world anthing that would make us sell our copper cheaply.
    It would also make sense to prosecute one of the mining companies for pollution, there are lots of contenders for that,The fines should cover the cost of cleanup, to western european standards, and be punitive to discourage companies from disrespecting the health and lives of Zambians.

    All government deals with the mining companies should be subjected to full disclosure and be subject to annual review. Of course the mining companies need to get a return on their capital but there are lots of them and some will work for less return then others.If the deals are transparent then Zambia will get a better deal.
    I am Irish and married to a Zambian lady and feel a lot for the Zambian people. You have a rich country so dont left the western and chinese world steal your childrens heritage for the price of a few cheap politicians. Who by the way are incredibly stupid to sell the copper for so little.

    Anytime I have suggested a new business idea for Zambia to my Zambian friends they tell me I have to bribe somebody to do something.
    For me it would probably suit my business to do the bribe and get on with it. But if I do I will be recording and filming my bribes and making the footage available to the Zambian people on YouTube.

    If the politicians realised that it IS in their interest that Zambia becomes a rich country and they and their children will all gain much more in the longterm then taking a few bribes now.

    The Zambian people are very good people so come on now and get it together.

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  31. Node-Net,

    The cost of the windfall tax should be as high as the market will bare. Copper is relatively cheap because Zambia sells it cheap.

    Right. If Zambia would take it's supply off the market, prices would most definitely rise. I don't know if anyone has even looked at what the optimum level of supply is, with regards to the price of copper. Instead, we're seeing a nearly infinite deferring of taxation, so mining companies can increase their production (or that is what the excuse is). And there is way too much identification between the minister of finance and the mining companies. He seems to keep explaining the mining companies point of view. It is almost as if... he is their representative?

    But if I do I will be recording and filming my bribes and making the footage available to the Zambian people on YouTube.

    That is great. I'm looking forward to watching them. :)

    If the politicians realised that it IS in their interest that Zambia becomes a rich country and they and their children will all gain much more in the longterm then taking a few bribes now.

    I have never understood the bribe taking phenomenon. There is so much more money to be made just developing the country.

    Like Magande turning down 3 years of taxation, literally hundreds of millions of dollars.

    Is the ruling class afraid that a fully developed country will undermine their power? It probably will, and it would make them and their type of politics obsolete. So maybe they have a conflict of interest, with regards to development. Maybe they are just against development they can't control. Maybe that is why they are so in favour of having the economy be foreign owned, instead of Zambian owned.

    ReplyDelete

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