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Tuesday, 9 September 2008

Magande's Economic Philosophy (Guest Blog)

Every awakened country controls how its resources – physical, capital or human resources are exploited. And Zambia shouldn’t be any different.

You attract investors to bring their resources – capital or expertise. But shouldn’t ask them to come and unfairly (steal) your resources. Neither should give you away your resources without a just cause. It is a myth and basically carelessness to allow foreigners to come and make profits ad infinitum.

This in some way captures the tenets of Finance Minister Nga’ndu Magande’s economic philosophy. He loves investors because they can help him to generate growth. But he doesn’t think much about what happens to the resources people are rushing down for and the impact on its people.

Investors should be allowed to come and make reasonable profits and not exorbitant or abnormally large ones. They can only do so if the host country is allowing them, foolish or sleeping. In this day of commodity thirsty world, it is not necessary to beg investors, if you know what you are doing. Magande’s economic success is by and large based on appeasing investors. He handles investors like eggs.

To avoid being in a weak position, that entails that a host country has to do some homework – in comparing and studying how other countries with similar resources (such as copper) are doing. In this category you have: Chile, Peru, Mexico, Russia and DRC also producing sizeable amounts of copper, from whom we can take lessons. If profits being made in Zambia are not comparable to these countries, then you know that there is something wrong with the way Zambia is conduction its business.

In Zambia, it is also common to adopt a policy only for the sake of reaping political capital to the owners of policy. In other words, if say, bringing in Chinese investments, would earn enough votes to the policy designer or party – it doesn’t matter even if the Chinese’s benefits outweigh the host country’s.

In this line, while Nga’ndu Magande earns credit for presiding over robust economic growth of over 5% in Zambia – he earns low marks when it comes to the following:- a) It’s sustainability; b) The long term goal of preparing the country for the “without-copper-day”. What happens when copper is exhausted or becomes obsolete? You probably wouldn’t get an enthusiastic answer from Magande’s camp.

Because of this uncertainty, that is why many advise that when the copper prices are at a peak, that’s the day to take advantage, in maximizing revenue from it and/or diversifying the economy from it. On these two scores, Magande’s policies are empty. To some, Magande seems to have a strange conviction or fear that – asking for a review of royalty fees upwards would scare investors, such that they would pull out. These fears have probably been toned down ever since Pres Mwanawasa took a strong unilateral stand to review taxes and royalties up. He did it not on advice of Magande. If anything Magande was reluctant.

It is my view that investors would not pull out, if the facts are pointed out as to why the re-assessment was necessary. If the host country is frank in its approach, some of these investors might even feel a little embarrassed for trying to be exploitive. In any case, why would a country be interested in ‘exploitive’ investors rather than have cooperating partners?

And, c) perhaps the biggest criticism I have against Magande/Caleb/Levy’s economic policies – is that the package lacks well defined “social justice” content. Economic growth without ‘social justice’ is not sustainable. Obviously Magande believes in “trickle-down” economics which doesn’t work. There is a lot of literature to back this claim up.

The idea is, while its okay for Magande to find ways of promoting economic growth – wouldn’t it be better if that growth was inclusive? Economic growth, from which even the majority of people are deriving benefits from, is a preferable one. I just visited Zambia, what I saw is that – in spite of this impressive economic growth, the majority of Zambians (over 90%) seem to be worse off.

I don’t how and why having many Shanty Compounds would be a good measure? Also misleading would be counting – the number of SUVs, petrol stations, Manda/Leopard Hills or White Villas. Existence of these is a symptom that the middle class is growing and that, since at the same time living conditions of those in Compounds are deteriorating – the gap between rich and poor is expanding.

The only improvement which should count – would be the reduction of the gap between rich and poor Zambians. But this can only happen if there are deliberate policies to transfer (spend money) some economic growth on those living on a $1 per day. As a famous economist Joseph Stiglitz (Nobel Laureate) says – there need no be a trade-off between inequality and growth.

In summary, the point that needs to be made about economic growth generated by the copper boom is that – profits should not only benefit foreign investors. Surely the owners of resources also deserve something. To concentrate only on looking after investors is not fair even if along the way it is somehow, generating a larger GDP. Moreover, since copper is an extractive resource, it is bound to be exhausted. To prepare for that, that is why it would be prudent for us to plan for the arrival of that day now. There is no better way than to see a ‘social net’ in place before that doom day comes. As a pure economist, I doubt it if Magande is sympathetic enough to this cause.

Kaela B Mulenga (Guest Blogger)
Toronto, Canada
zbia@hotmail.com

14 comments:

  1. Some interesting ideas:

    http://blogs.wsj.com/economics/2008/04/14/why-dont-more-poor-countries-get-rich/

    Could be a bunch of things all combined.

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  2. thank you kaela for highlighting this, Our people are being blind folded on the surface and have no idea to long term implications of these so called national developement schemes. The world needs to know that three quarters of these investors are in zambia for their gain and that of the the person iniating the deal and not long term improvement on the zambian life. I frequently go home and surely the gap between the rich and the poor is increasing daily. the poverty and jobless ness is despeakable meanwhile contracts to mine Zambias wealth are everyday. what happened to the commitement investors had on supporting community developments.

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  3. Dr. K.
    I find your research relatively shallow and misleading here. For one thing, Chibiliti, Secretary to the Treasury was for the whole month of January in sessions with the mining conglomerates in talks for increased revenue under instruction from Magande. Credibility, which I am assured this blog stands for,is not about attacking ad hominen. You ought to cite your literature.

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  4. In summary, the point that needs to be made about economic growth generated by the copper boom is that – profits should not only benefit foreign investors. Surely the owners of resources also deserve something.

    Here is a different model.

    1) The state owns the minerals/land that the minerals are in or under.
    2) The state hires mining companies to exploit the mineral resources. This is essentially a construction job. The same way you hire someone to build a house for you, but then don't say the builder owns the house, the mining companies should exploit minerals on behalf of the government, for a fee, and perhaps a SMALL percentage for the profits (no more than 10%) if they complete their work on time and on specification.

    3) The state has complete transparancy in ALL it's financial dealings.

    This is not difficult. If the government says no to financial accountability and transparancy, we should presume that OUR money is being stolen and hold the state accountable.

    Back at the NCC, two of the ministers actually argued against parliamentary oversight, by stating we should just 'trust the finance minister'. What an unmitigated gall.

    What too many politicians do not understand is that state money is not their money, just because it ends up in their budgets.

    So that would be the package: mining companies work for the state, and the state works for us.

    And another thing.

    There is so much money in the mines, that WE DO NOT NEED FOREIGN INVESTORS. There is no financial need for foreign investors. With the mines making at least $2400 million per year in profit, we don't need foreign investors.

    The more I read about it, the more I think that this emphasis on having foreign capital run the Zambian economy, is about keeping the people of Zambia disempowered, to there will be no shift of power away from the political elite. This love of foreign capital and a foreign mercantile class is a way of protecting the political class from competition.

    Feel free to comment.

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  5. Mr K,
    "profits should not only benefit foreign investors. Surely the owners of resources also deserve something. "

    They already do, in the form of mining taxes.

    Mr K,
    "1) The state owns the minerals/land that the minerals are in or under.
    2) The state hires mining companies to exploit the mineral resources. "

    This is a model that could work if done properly:

    http://technology.infomine.com/reviews/ContractMining/welcome.asp

    Though that would bring other questions up, would you give compensation to current mine owners and what would be considered a fair compensation. What happens if copper prices head downwards as they are doing now? What happens if it becomes uneconomic to operate the mine, will they be shut down or the government subsidize operations to save jobs?

    Mr K,
    "There is so much money in the mines, that WE DO NOT NEED FOREIGN INVESTORS. There is no financial need for foreign investors. With the mines making at least $2400 million per year in profit, we don't need foreign investors."

    True as long as prices stay high and if the government is able to fund mine expansion by itself. Remember oil prices were also very high but have started falling. With lower prices, the government would bear the capital costs of mine expansion. And what would the thoughts of aid donors be about this? Should they continue giving aid while the government funds mine expansion?

    Mr K,
    "The more I read about it, the more I think that this emphasis on having foreign capital run the Zambian economy, is about keeping the people of Zambia disempowered, to there will be no shift of power away from the political elite. This love of foreign capital and a foreign mercantile class is a way of protecting the political class from competition. "

    Not really, the market decides what manufacturing processes are viable and funds them. The government does not have the expertise in this area and would be liable for capital losses if the venture fails (a risk the private capital would bear if it funded it). In addition there isn't sufficient capital within Zambia to fund business expansion.

    ReplyDelete
  6. MrK,

    "The more I read about it, the more I think that this emphasis on having foreign capital run the Zambian economy, is about keeping the people of Zambia disempowered, to there will be no shift of power away from the political elite. This love of foreign capital and a foreign mercantile class is a way of protecting the political class from competition."

    lol!

    Not sure I would put it that way, but you are of course correct that politicians are essentially "self serving". They try and balance what is good for their business and what is good for them to get re-elected. The latter of course is irrelevant is in the absense of strong political competition.

    A good example of where personal interest of rulers led to GOOD policies is Botswana. Its argued by many that Botswana developed an early system of property rights because many of the traditional leaders were into ranching.

    ReplyDelete
  7. MRK said

    "There is so much money in the mines, that WE DO NOT NEED FOREIGN INVESTORS. There is no financial need for foreign investors. With the mines making at least $2400 million per year in profit, we don't need foreign investors."

    lol

    We've tried this.

    I believe in partnerships but please don't let our politicians run our economy. You also contradict yourself by pointing out our politicians are self-serving. Do you want those to run our mines????

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  8. CF,

    We've tried this.

    I don't think we have.

    I believe in partnerships but please don't let our politicians run our economy. You also contradict yourself by pointing out our politicians are self-serving. Do you want those to run our mines????

    Not our politicians, but after depoliticizing the civil service, it could provide oversight. In fact, I would not even have any relatives of politicians be allowed in management positions of parastatals. The government can always attract human resources from the private sector.

    There is no reason why the mines cannot be operated on behalf of the state.

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  9. CHO,

    Not sure I would put it that way, but you are of course correct that politicians are essentially "self serving". They try and balance what is good for their business and what is good for them to get re-elected. The latter of course is irrelevant is in the absense of strong political competition.

    At what point are one politician's businesses competing against another politician's businesses?

    There is an article in The Post:

    Banda's threats to critics' businesses worry Hakainde
    By Patson Chilemba and Lambwe Kachali
    Sunday September 07, 2008

    OPPOSITION UPND president Hakainde Hichilema yesterday observed that Zambia is already seeing dictatorship from Acting President Rupiah Banda’s camp through their threats to suppress commercial interests of individuals who opposed his candidature.


    That would be an example of the phenomenon.

    By the way, the book "The Politics Of Patronage In Africa" by Roger K. Tangri is a recommendation. It has whole sections on Zambia, as well as Zimbabwe, Uganda and Kenya. The new price is outrageous, but used prices are very good. Also in paperback.

    ReplyDelete
  10. KAFUE001,

    Mr K, "profits should not only benefit foreign investors. Surely the owners of resources also deserve something. "

    They already do, in the form of mining taxes.

    I was quoting dr. Kaela Mulenga there. It has to be remembered that up until last year, the $4,000 million industry payed $6 million in taxes. This year, they are projected to pay $413 million in taxes. Which in my mind is not enough.

    This is a model that could work if done properly:

    http://technology.infomine.com/reviews/ContractMining/welcome.asp


    That is great. There are a lot of mining sites that are not being utilized by the companies that bought them. If the government enforced it's 'use it or lose it' policy, those properties could utilized through contract mining. They could even make deals with present mining companies to use their expertise and infrastructure to set up contract mining companies.

    Chiefs could also exploit mines through contract mining. It could ensure that money from the mines ends up locally.

    Though that would bring other questions up, would you give compensation to current mine owners and what would be considered a fair compensation.

    I think they mines have made so much money already, that something can be worked out. They have more than made back any capital investments they have made already.

    What happens if copper prices head downwards as they are doing now? What happens if it becomes uneconomic to operate the mine, will they be shut down or the government subsidize operations to save jobs?

    Which is why time is of the essence. We should be making use of high copper prices to diversify the economy and funnel money into agriculture, manufacturing and infrastructure.

    I think the government should never subsidize loss making mines. If they make a loss, close them down. Alternative labour should be provided for the mining communities in agriculture and infrastructure creation.

    In fact, the government should take into account the cyclical nature of commodities prices, so it can make use when prices are high and switch to other industries when prices are low.

    Remember oil prices were also very high but have started falling.

    They were up to $150 per barrel, I think they are now making a low at $100, but I think the conditions are such that they will go back up.

    With lower prices, the government would bear the capital costs of mine expansion.

    When prices are low, why would mines expand? They should be reducing their output.

    And what would the thoughts of aid donors be about this? Should they continue giving aid while the government funds mine expansion?

    I think the only reason why they keep giving donor aid is so we won't nationalize the mines.

    In 2004, the Zambian government received $600 million in donor aid (and collected $1100 million in taxes and levies) - the total budget was $1700 million.

    The same year, the mining industry's turnover was $4000 million, of which I estimate $2400 million were profits.

    If they taxed half of those $2400 million and collected $1200 million, they would still receive twice the $600 million they receive in donor aid.

    So I wouldn't worry about donors at all. And in fact, I would much prefer that money came from taxes than from 'donors'. There are no strings attached to tax revenues as there are to donor aid. Remember that donor aid makes Zambia dependent on foreign powers - not only in how the aid is spent, but through their power to withhold donor aid and take 1/3 out of the government's budget overnight, as they did in Zimbabwe.

    Not really, the market decides what manufacturing processes are viable and funds them.

    Oh no it doesn't. There are more market failures than there are government failures right now.

    There are also massive market distortions that prevent supply and demand working properly. For instance, massive western taxpayer subsidies have wiped out entire agricultural sectors in Mexico, Jamaica, etc. Even though local Jamaican farmers can produce food cheaper, US agribusiness corporations can sell it in Jamaica cheaper because they get 80% of the cost of their product subsidized. The same thing with the 'Free Trade Zones' that benefit foreign capital in Zambia with regards to interest rates, loans, import taxes, labour, etc. over local businesses. The same for the 'Development Agreements' with regards to local miners. Also, during privatisation, there were projects that Zambians were specifically excluded from bidding on.

    Look at the issue of interest rates. In theory, interest rates should be slightly below the inflation rate. In fact, interest rates have never followed inflation into single digits. There are constraints on supply of low interest rate loans that had nothing to do with market forces.

    So I don't believe in 'free markets', because I have never seen one. There are alway constraints that work against market participation. The government should actively take away those constraints, but the government just withdrawing from markets doesn't work.

    The government does not have the expertise in this area and would be liable for capital losses if the venture fails (a risk the private capital would bear if it funded it).

    I disagree with regards to the mines, especially ZCCM. There are plenty of Zambians who have been running operations in the mines. There are different models that would lead to the effective running of parastatals.

    There has to be a separation between politicians and the state though. And that means a professionalisation of the civil service. A massive reduction in the number of civil service positions appointed by politicians and specifically the president and complete meritocracy in hiring and promotion are a place to start.

    In addition there isn't sufficient capital within Zambia to fund business expansion.

    There is plenty of capital in the mines. :)

    Which by the way is how the mining companies are funding their capital goods investments.

    Interesting conversation, and thanks for the contract mining link.

    ReplyDelete
  11. Mr K,
    "This year, they are projected to pay $413 million in taxes."

    The $413 million is additional taxes on top of the $250 million they were already projected to pay.

    http://www.forbes.com/afxnewslimited/feeds/afx/2008/01/11/afx4520855.html

    ReplyDelete
  12. Kafue001,

    There are many uncertainties over the legendary £415m figure, aside from its strange precision. I would not rely solely on the Forbes article as "evidence", not only because today we learnt the mines are not paying some of the windfall, but also because no one knows how it was calculated or what the government meant by additional. Up to now we keep searching for that elusive report held at the Ministry of Finance, which only a transparent government would dare release.

    I am sure MrK recalls the many discussions we have had over this. The ones that come immediately to mind include these :

    The State Vs Mining Companies? (Part 1- Opening Shots)

    BOZ Quarterly Brief (Q1 2008)

    Mining Watch (Guinea)

    A new "clarification" on mining taxes.....

    A secret GRZ / IMF compromise on mining taxes?

    ReplyDelete
  13. http://www.times.co.zm/news/viewnews.cgi?category=11&id=1221120032

    This article shows there is not enough capital in Zambia for expansion.

    ReplyDelete

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