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Tuesday, 20 January 2009

Reflections on Zambian Airways (Guest Blog - KBM)

At the word go – let me wish all the readers of this post, many hundreds, judging by the many feedback messages I get – A HAPPY AND PROSPEROUS NEW YEAR! Thank you for your support. Above all, let us all join in wishing the in-coming American President – our own, Barack Obama good luck in his tough responsibilities. The expectations placed on him are enormous, but I am confident that he is ready to face this new challenge. This is an historic moment!

The choice of my topic is therefore, directly related to America, which is the bastion of capitalism. We have an interest in analyzing a case of Zambia Airways (Q3) particularly because this company is owned by those who hate capitalism (by implication socialists) like Fred Membe of The Post, partnering with Nchito Brothers (Nchima & Mutembo) – who have been prosecuting Fredrick T Chiluba (FTJ) in essence, the introducer of liberal and free market system in contemporary Zambia.

Prof. John Lungu at the Copper Belt University (CBU) not too long ago issued a statement which carries a lot of truth. He said: “Zambians have embraced capitalism, but yet fail to act as one”.

Yes, if the country wants to use capitalism as a model for developing Zambia, those in the driver’s seat – both in government and private sector must learn to behave and act as ‘capitalists’ or else we should go back to the socialist system. Certainly if we pretend or fake our being capitalistic when we are not, that helps no one.

What are some of the implications for these murmurs?

When in 1991 ex president Fredrick T Chiluba took a sharp knife and cut-off literally all ZIMCO para-statals from government control as a way to liberalize the economy from Kenneth Kaunda’s (KK) socialistic humanism – he was sending a strong message to all of us – that, from then whence forth, Zambia had joined the world of competition. And as they say in the business world of competition, you either learn to compete or die.

It is against this background we must analyze the Zambia Airways’ (Q3) demise.

In order to see the link between the suspension of operations announced by Zambia Airways and capitalism – ask yourself this question. What is common between the Big Three American auto companies (GM, Ford & Chrysler); the Canadian Nortel Networks Corp; AIG (world’s largest insurer); and our Zambia Airways?

The short answer is – all these companies are either filing for bankruptcy or lining up for taxpayers’ money to give them a breathing space so that they can, so they hope, re-structure or re-organize their operations. And why are we in this situation? It is because a lot of these companies forgot (or neglected the importance) that they were operating in a globalized competitive miljó (environment).

Evidently too, these companies, though privately owned – kept on producing products and services which nobody wanted to buy. It is either that or they were not competitive enough on the market. Consequently they lost out to other more competitive companies. This is precisely as the capitalistic market is supposed to function.

So, let’s face it – the main reason why Q3 has been grounded is because the company began turning out losses instead of profits – violating capitalistic principles. That happens when the demand for goods and services being produced shrinks. In turn, this creates the inability of a company such as Q3, to settle its bills.

Also when the demand is weak, especially in a scenario where costs are going up – the natural tendency would be to pass some of that to the customers. Perhaps this is what Q3 was hesitant in doing, namely – increasing air-tickets. That was not done in fear that, it would result in customers’ attrition.

It is also widely known that – Q3 managed to survive partly because the late President Levy Mwanawasa ordered government business to be sent their way. This favor provided because of the cooperation Mutembo Nchito and The Post rendered in the campaign against corruption, gave Q3 a false economic security. When attacked about this nepotism, Mwanawasa often retorted by asking – “do you guys expect me to appoint or help my enemies?”

Given this fact that government assisted the airline where it could, therefore in my opinion, we must lay some of the blame for Q3’s failure, squarely on the shoulders of management and/or owners who tend to put undue influence on managements and board of directors.

Even though pure greed of Wall Street CEOs and the external shocks caused by high crude oil prices can take some blame – in the final analysis, those who have been running Q3 must be prepared to take some responsibility.

Let’s put the argument in a different way so that there is no misunderstanding. Toyota is now probably the most sought after car brand in North America. Why is that? Yes, it is because Toyota Company strives to produce models and features customers are looking for. Hence, it becomes a dominant automobile on the American market.

In the telecommunication sector – corporations like the Canadian Nortel Networks Corp got out paced by other companies. In the internet and cell phone (wireless) markets for instance, it could not compete with the Finish Nokia, Swedish Ericsson or Samsung models. Moreover, its Canadian cousin – Black Berry has taken a large chunk of its market. It is therefore no wonder that Nortel Corp’s share stock value shrank from a high yielding US$124 per share to a paltry forty-cents per share today.

Believe it or not, the same demise has befallen a privately owned Zambia Airways. This must be admitted.

For once, I have had to agree with one of Ruphia Banda’s (RB) Minister’s position being taken on this case so far. Hon Dora Siliya, Minister of Transportation, who surprisingly with clarity stated that, and I quote – “Zambia Airways suspension of operations would not negatively impact the tourism industry as other operators would absorb the demand”. That is right on!

It is true that tourism is an important component of the – diversification process of the economy from copper mining to other non-mining sectors such as agriculture. But that is not enough good reason to bail out an ailing company such as Q3. We recall that when another Zambian privately owned company – Meridian Bank was in the same situation, it sank. And nobody rescued it.

One reason why the “old” Zambia Airways was de-nationalized or disbanded is because it failed to operate efficiently. Even under government watch, it simply could not compete with other airlines. It became moribund. Thus, I am not sure if re-nationalizing an already loss-making Q3, a surrogate, would improve things. And giving it more money without a government watch dog is like throwing good money onto the bad ones.

Besides, that would be rewarding shoddy and inept decisions made by the boards. Thus, Q3 bail out lacks merit unless it was to be sold or operate under a new management.

If the Zambia Tourist Board (ZTB) under the chairmanship of Errol Hickey has done such a good job to attract tourists, the departure of Q3 would not and should not affect them negatively – because I am sure somebody else would be interested in shuttling those tourists around to tourist attractions. So long as there is lucrative business to be made – the vacuum would always be easily filled by somebody else. Those who intend to politicize Q3’s demise by preaching a dooms day if the current Zambia Airways was to die, is by itself, the toxic poisoning the investor confidence.

In the event that local entrepreneurs are not imaginative enough, be sure that foreign travel agents or other investors from outside would take the chance. These days communication and transportation technology is so advanced that nothing is impossible.

Mark that – in principle though, I am not totally against bailing out companies. But at least two factors have to be taken into consideration here. First, if President Ruphia Banda opts to assist Zambia Airways – I think that would be a significant departure from Mwanawasa’s economic policies.

Part of Mwanawasa’s success was a strategy to minimize government spending. He kept civil servants’ salaries in check. In that faculty President Banda has already agreed to the awarding of new salaries to Ministers and constitution office holders. Moreover, expanding government spending at this time would not be wise given the declining copper prices, which automatically limits government’s revenue base.

Further, many Zambians failed to see that – in congruency with his Chief Banker – Dr Caleb Fundanga at Bank of Zambia (BOZ), Levy Mwanawasa was in practice, a monetarist. Monetarists insist on balanced budgets (hence are tight spenders) and believe in limited or strictly controlled money supply. These twin actions worked well for Zambia under his (Levy) tutelage.

Also Mwanawasa’s tight fiscal policy – under the direction of his Minister of Finance, Ng’andu Magande – coupled with the taming of inflation by BOZ, won a lot of praise from overseas. That is why the Zambian government got a positive response in terms of reducing or being forgiven on foreign debts. So should His Excellency Banda reverse this, so early in his presidency – would not be sending a good signal to foreign investors.

Domestically, many people would also start reevaluating his intentions – judging any hand outs he gives as a precursor for the re-adoption of the UNIP School of socializing everything. With no doubt, that would start killing the private-initiatives Zambians have now become used to.

It is also wrong, as some people are suggesting, taking President Barack Obama’s pill in United States as a panacea for solving Zambia’s economic problems. You do not bail out just for the sake of bailing out. Bail outs which are being touted in the USA and other more advanced economies, are intended to ameliorate globally, the impact of financial meltdown and to prevent a probable total collapse of the world economy. Q3 is no such giant to compel government to come to its rescue, especially at this time when obtaining credit or liquidity assets is so tight world over.

Even if one was to ask John Menard Keynes the theorist behind encouragement of government interventions, through government expenditure - he wouldn’t advise us to spend a penny on a failing private company. But on the other hand, he would definitely support President Obama’s approach since Keynes is the one who first pointed out that – economies are not self-correcting perpetual motion machines.

Based on this observation, which has also been studied empirically, it is argued therefore, that some government measures would be necessary. Doing nothing or self-regulatory principle – like the G.W.Bush/Dick Cheney doctrine, does not always work. So long as of course, those medicines used are remedying the economy as a whole. Plus, we must also make sure that we do analyze real-time conditions accurately.

This is why I concur with Minister Siliya on the suspension of Q3. We have nothing to fear so long as tourists keep on coming. (Their attraction to Zambia is not determined by Q3, but the quality of tourist attractions). When there are no tourists coming, if there is sufficient interest for Zambians to travel to domestic destinations such as Solwezi, even in that case, other companies would be formed to take the place of Zambia Airways.

There is ample evidence to show that – usually monopolies (which Q3 is on the domestic market) – tend to be inefficient. Opening up for competition, not only improves operations, customers gain because goods and services (G & S) tend to become cheaper. This can be demonstrated by the arrival of more telecommunication suppliers and mobile providers on the Zambian market like Celtel. As a result, cellular phones became cheap enough such that anybody including ‘Ba Kaponyas’ could afford owning units.

The other important point is that – even though tourism is an important sector, Q3 by itself, is a very small part of the economy carrying a small number of employees. Therefore its closure would not be a doomsday for the country. Two-three hundred employees cannot even be compared to over two thousand jobs being lost at Luanshya.

And since it is highly doubtful – that the Nchito brothers and Fred Membe’s group would let go of that company so that an effective restructuring can take place under new ownership – liquidation should be the natural consequence.

If anything, it should be Baluba Mine which should be crying for help. Unlike Q3, closing a mine would certainly be impactiful. And quite frankly, the importance of Nchito brothers’ ZAirways Company is being overblown. This is partly because the owners and major shareholders – Nchito brothers and Fred Membe, are high profile names in the Zambian society. The former being prosecutors of an ex President Fredrick Chiluba and the later, is owner of an influential paper, The Post.

And should Q3 die/be faced out, as competitive marketing system mitigates – I am sure we’ll be treated with many nasty editorials in The Post. But in spite of that threat, my advice to Ruphia Banda’s government is this: in spite of the strong backing being given to Q3 by some stakeholders and interested parties – who are trying to win public sympathy for the airline, please go for a decision, which takes into account the bigger picture and not just narrow interests.

And always remember that any government intervention is not only going to be judged from Q3 customers’ viewpoint. You have other business investors and competitors’ behavior to consider. Some of these might be looking at this situation as an opportunity for new business. It is also quite possible that the new entrants, when the opportunity arises – because of increased efficiency, might come up with better and cheaper services. Shouldn’t that be a goal of everyone?

Also do not forget that Zambia is in Southern Africa, which includes South Africans and Kenyans who might be interested in filling up the vacuum – provided of course if they can acquire permits.

I further submit to all the readers of this column – that, it is not only economists who are aware that capitalism or market system has imperfections some of which can only be corrected by either regulations or an infusion of tax payers’ cash. But what must be avoided is the misuse of this thinking. This is especially dangerous in countries like Zambia, where the ideological divide or difference between political parties, is non-existent, as it is explicitly clear in USA for GOP (Republicans) and the Democrats.

In Zambia because this line is blurred, politicians as well as private citizens do unduly take advantage of this situation. Hence, instead of the allocation of development of resources or opportunities to be efficiently done in the market place – those are dished out through favoritism or on whom-you-know basis. This is an impediment to growth.

In closing, let me warn especially you my country men, that, difficulty times abound – we should not destroy private initiative fabric, after having worked so hard to introduce it. We cannot go back to the old INDECO LTD days. Thus, it is essential that – if our country stands a chance to prosper for the good of all its citizens and secure future for our grand children, we must remain focused on implementing the Mwanawasa economic strategy, which led us back to the six-percent annual economic growth. This is the only way we can get to the Promised Land.

We have dithered too many times before and hesitant to move on – in the process, managing only to enrich a few at the expense of everyone else.

Kaela B Mulenga (Guest Blogger / Canada)
e-mail: zbia@hotmail.com

15 comments:

  1. But isnt it abnormal for an Airline to sacriface space inorder to lift Jet Fuel from South Africa were it is 40%-50% cheaper? This is what Zambian Airlines was doing because they had no alternative. DAS Cargo stopped carrying cargo to and from Zambia. Their main complaint was as usual, fuel costs. British Airways used to land first in Harare to fill-up before proceeding to Lusaka. With problems in Zimbabwe at the turn of the century they changed their strategy and phased out the B747 on the lon/lsk route. They introduced the more efficient B777. They were able to do this because of the resources at their disposal. Even after doing so they still pass on the fuel costs to their clients. That is why it is cheaper to fly from London to Joburg than Lusaka. Look at all angles, Kaela.

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  2. By the way Frank British Airways are using B767 London-Lusaka-London

    From the time Zambian Airways introduced regional routes, it was evident that the Airline was not going anywhere in the near future. There were a number of reasons to sustain my statement as i have seen Airlines come and go.One of the reasons is the low fares the Airline introduced and were never reviewed for along time. A private Airline Just like National Wide or Alitalia etc should be real with its fares system because this can cause in impact in long run. When you charge low fare in order to attract travelers whos paying the deference?? Is it the Govnt or shareholders? Zambian Airways was better off as Roan Air in those days. The second reason is the type of staff Zambian Airways employed that had no customer care from my experience. This had a negative impact on the operations of the Airline.

    From AK

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  3. Zambian Airways (like the Post is) was being run like a "tuntemba" with the "high and mighty" thinking that they "know it all". These businesses are "specialised" and require qualified and experienced stewartship. Lawyers and press bullies can not operate companies that have evolving business models !

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  4. KAELA B. MULENGA,

    There is ample evidence to show that – usually monopolies (which Q3 is on the domestic market) – tend to be inefficient. Opening up for competition, not only improves operations, customers gain because goods and services (G & S) tend to become cheaper.

    Competition is GREAT - except for businesses and investors. :) The reason is that competition cuts into any company's bottom line. They have to have marketing campaigns, face price wars, etc. which are usually won by one major player.

    As a result, it takes government regulation to ensure the continuation of competition. Without anti-trust legislation, you end up with a corporate monopoly, instead of a state monopoly (Microsoft owning 90% of the Operating System market is a case in point).

    The way that happens, is that during recessions, the weakest companies not only go under and cede their market share to the remaining company, but often they are taken over by successful companies. Before long, only a single major player will dominate the market space and will be big enough to crowd out any competition.

    Generally speaking, most developed economies have a mixed economy, with state owned enterprises existing next to the private sector.

    There is nothing special about the private sector, and there is no reason why state owned enterprises by definition would be badly run.

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  5. MrK, Nobody is suggesting doing away with government regulations. You need them to control the functions of the market. The financial crisis on Wall Street failed partly because of that. But government participating and being active on the market should be discouraged.

    In Zambia, para-statal system - government running or participating in businesses didn't work well. ZIMCO, ZCCM, and Indeco companies were just "bood suckers". In the meantime the economy kept on shrinking. Why go back to a failed experiment?

    Moreover, in Africa resources are best and fairest allocated using the market, otherwise big-men and corrupt bureaucracy will misallocate them to those they favour. Whileas on the market you either sink or swim.

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  6. Moreover, in Africa resources are best and fairest allocated using the market, otherwise big-men and corrupt bureaucracy will misallocate them to those they favour.

    I disagree. The private sector is not by definition less corrupt than the government.

    Look at the mining companies and all the strings they pull to exempt them from paying taxes. That is corporate corruption right there. Look at the secrecy that so long covered the 'development agreement's. Abroad, look at all the corporate scandals. Or for that matter, the collapse of the world economy.

    Free market theory is over.

    I have been thinking very hard about what would justify foreign direct investment from a purely nationalistic point of view.

    The only thing I could think of, is when the company:

    1) has very low gross profits (30% of turnover or less) and
    2) every cent the company expenditures is spent within the Zambian economy - Zambian employees, suppliers, etc.

    That is the only way I could justify not taxing foreign companies or allowing them to repatriate profits.

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  7. If I may be so bold, I would like to suggest that the crux of this argument is not about the inherent properties of capitalism, statal corporations, international lending organizations, or foreign direct investment. I think that in each case both the proponents and opponents are in fact distinguishing between the benefits and detriments of centralized economic power, with attendant lack of transparency and accountability to external entities, which leads to patronage, potential for fraud, and disproportionate distribution of wealth.

    Each of you are correct to point out the ways in which economic power can concentrate in potentially harmful configurations within all of suggested models. Each of you are equally correct to call attention to examples which demonstrate that this need not be the case. Both governments and markets function better with greater participation and transparency. Where both go wrong is when the plausible excuse for secrecy is abused for personal gain. Within the confines of the Zambian case, while I empathize with MrK's vehement disgust with the priorities and practices of international venture capitalists, from a practical perspective I agree with the original author, KBM, that the solution going forward is to pursue a leaner, more monetarist government, oriented towards effective oversight rather than direct management.

    One thing that the Americans have got mostly right is the whole checks and balances thing. The big one is of course the power of the purse in the hands of the legislative branch. No agency of the executive can spend a cent until approved by the legislature. This can and has resulted in near total shutdown of the US federal government from time to time, and serves as the ultimate means by which to demand accountability from the executive branch (which appoints the judiciary after all). As Gershom Ndhlovu so ably points out, such a check on executive branch spending is not being performed by the Zambian legislative branch. It is perhaps too much to be hoped for that the NCC will produce a constitution which structurally embeds such checks and balances in any meaningful way.

    I also think that there is some merit in the way that the US government got its transcontinental railways built (also a lot to criticize, some of it error, some unfortunately not so much), using not so much a public-private partnership model as much as a parallel competitive investment one. First the government would decide where they wanted a railway to be built, then they would acquire all of the land for one mile on either side of it by eminent domain and divided it into lots of 1 sq. mile. Railroad companies would bid on the rights to build all or some of the proposed track, with their own funds, in return for every other plot of land along the railway. The other half remained in government hands, with both parties able to recoup their initial investment by reselling the land rights once the presence of the operational railway had raised the value.

    This process was fraught with problems, largely due to the arbitrary way in which land was acquired by the government combined with massive disparities in available information on the markets. A large proportion of "Western Folklore" centers around cases where unscrupulous venture capitalists would use foreknowledge of planned railway routes to trick or sometimes force natives and small holders off the land prior to eminent domain purchases by the government. (My personal favorite example of this Mel Brook's Blazing Saddles.) The central point I am hoping to make however is that they not only got the railways built, but the taxpayers didn't have to foot the whole bill or give up all the profits. If land had been appropriated properly, there could have been no losers.

    In the more modern case of aviation development, I am less certain of the exact history, but I can deduce some things from my personal experience. The US has a "hub and spoke" approach to most air travel, with even nearby destinations cheaper to access by going to the hub first rather than direct. Many hubs are also the locations of major airline headquarters, and such airlines tend to build, own, and maintain their own terminal, maintenance, and fueling facilities alongside the municipal hub infrastructure accessible to all players via bid. This enables hubs to increase volumes, again without requiring taxpayers to foot the entire bill or surrender all gains. It also means that for fastest travel or greatest flexibility, it pays to know which carrier is based where (i.e. If I am going to or through Oakland, I want Southwest Airlines. For Chicago, best to go with United. Atlanta -> Delta. Dallas -> American. etc).

    Since it will be rather difficult in the near future to offer competitive fuel prices to entice aviation operators to invest in Zambian airport infrastructure, perhaps they could be swayed by the prospect of 50% of the nearby transferable land rights. They could then either resell the leases to commercial ventures utilizing proximity to the airport, or invest themselves in order to diversify their portfolio and hedge against the higher fuel costs. If they are successful at triggering local development on their half of the land, then the government can then offer up additional leases to third parties on its own terms.

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  8. Free markets work. If you let them. What happened in the USA was a result of government interference & policy.

    Fannie Mae & Freddie Mac were quasi-government firms. Furthermore, sages like Warren Buffet had warned about the FMs way back in 2001.

    Anyway, to airlines... and ZA... It is time to sell ZA to any other investors. Let them run the airline as they want... (of course, meeting minimum safety standards)...

    In Tanzania, KQ were edged out by SAA in acquiring Air Tanzania BUT they went ahead & purchased 49% of Precision Air - a private operator. PA has since become the dominant airline in Tanzania.

    Considering economies of scale, either KQ or a SA airline would be the logical fit for Zambia.

    The entry of Kobil (of Kenya) can ameliorate the jet fuel situation in Zambia EXCEPT for government interference & insistence on using the local refinery!

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  9. MrK, you seem to disagree to my contention that private sector is a better model for allocating resources. You wrote – “I disagree. The private sector is not by definition less corrupt than the government”. You went on – “look at the mining companies and all the strings they pull to exempt them from paying taxes. That is corruption right there. Look at the secrecy that so long covered the development agreements. Abroad, look at the corrupt scandals. Or for that matter, the collapse of the world economy”.

    I think we should agree to disagree. Here is my rationale. If you would be our president, by killing all the “incentives”, you would effectively be imposing on the country ‘self-inflicted’ wounds. Are you not convinced that large foreign investments resources promoted by Levy are responsible for the six- percent or so annual economic growth?

    If you don’t attract investors thru incentives, how would you get the much needed development resources? How would you partner with foreign business houses if you don’t offer them anything in return? Even if you were to block or discourage private foreigners, what is left: governments (or its para-statals such in the case of China), government sponsored development agencies such as SIDA, CIDA, FINIDA etc., and bi or multilateral organizations like ADB, IMF/World Bank, IBAReconstruction and others. But even these would still demand from you some concessions of sorts.

    In short, so long as Zambia is starting from a weak (call it poverty) position – you have no choice but to create a selling point package. Patriotism by itself cannot breed resources. Talk to me about your position 25-50 years from today. May be at that time you would have a threshold number of Zambians with sufficient resources or those who would have learnt how to create wealth from its own natural resources and assets. And would have also perhaps been sufficiently exposed to world capital markets and have been able to make good business contacts and trade partners.

    Today, Zambia hasn’t got any saving capacity to talk of. Most people are too poor – barely just surviving. Moreover, a chunk of government’s budget is sponsored by outside. That is, Zambia is still dependent on the good will and generosity of other non-Zambians. I am surprised at your boastful talk.

    And by the way – agreements are entered into by two parties. If Zambians are incapable of negotiating good deals, whom do you blame? I know some friends from graduate school in IMF/World Bank, who tell me that – when their teams visit Africa, it is common that the African teams just come to listen and not negotiate. Often they come to meetings ill-prepared with no counter proposals. Consequently, they (Africans) end up with IMF/World Bank suggestions with or without modifications. You see!

    And the secrecy you are talking about is partly business intelligence. With today’s access to internet – a lot of vital information even about prospective investors can be accessed in advance to strengthen ones negotiating power. F. example, I can bet you that not many in our government make use of the wealth of information available on Zambian Economist.

    A lot can be harvested from this blog.
    And getting back to our original topic – bailing out Zambia Airways, I have to agree with Anonymous who compares the running of it to a “Tuntemba” with the “high and mighty” thinking that they “know it all”. These businesses are indeed very “specialized” requiring competent, very qualified and experienced people. Price-setting and/or variations, and air tickets discounting is a very tricky business indeed. Sales and service in air industry, is also very critical. Q3 fails all these tests.

    And finally, MrK, I can’t understand why you would think that having a mixed economy is an argument to support or bail out a failing company. In the West at least, and now more so even in China – it (mixed-economy) is the dominant model. Why? Because society needs two different types of goods to be produced – public goods and private goods. Public goods such as high ways, bridges, public utilities such as electric grids & nuclear plants, schools, hospitals, etc., are quite understandably a responsibility of governments. They have the resources and are the ones obligated to produce goods you can’t price. But shoe cobblers, and hair cutters must be small men at shop corners.

    I can go on, but you have not convinced me as to why government should bail Q3. There is not even a good political argument, except it (the action) only being forced on government by lobbyists. Why do we want to go backwards? Cheers!

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  10. Kaela,

    I think we should agree to disagree. Here is my rationale. If you would be our president, by killing all the “incentives”, you would effectively be imposing on the country ‘self-inflicted’ wounds. Are you not convinced that large foreign investments resources promoted by Levy are responsible for the six- percent or so annual economic growth?

    What I would say, is the way privatisation of the mines was carried out, ensured that the impact on the Zambian economy would be minimal.

    The growth of GDP has been cosmetic, because nearly all of the profits, have been expatriated and have not ended up in infrastructure or economic sectors like agriculture or manufacturing.

    In it's zeal to attract foreign investment, they did not ensure a maximum impact or look at any multiplier effect of foreign companies doing business in Zambia.

    As a result, as the prices have gone down, these very same companies who wanted to pay no taxes are leaving the country. Unethically, they continually 'threatened' to leave if they had to pay taxes, but as soon as the price of copper came back down, they did just that - leave.

    Then, there was the assurance that 'prices would not rise', as stated by Edith Nawakwi. My guess is that even if a windfall tax clause had been included in the development agreements, these foreign mining companies would have tried a way to wriggle out of that too, by understing their profits and overstating their costs, or by just not paying and I guess depending on the politicians they bought to not enforce the law.

    In short, so long as Zambia is starting from a weak (call it poverty) position – you have no choice but to create a selling point package.

    I completely disagree. Zambia has copper, and it had better sell that as dearly as it can.

    Patriotism by itself cannot breed resources. Talk to me about your position 25-50 years from today. May be at that time you would have a threshold number of Zambians with sufficient resources or those who would have learnt how to create wealth from its own natural resources and assets.

    I don't think time will heal all. Without a clear vision of how the economy is going to grow, and by handing over Zambia's resources to foreigners, Zambia is not ever going to develop. Unless the people are at the center of economic activity and not corporations, the government or foreign companies, there is never going to be meaningful development.

    Instead, let's look at how Japan and Korea built their Keiretsu and Chaebol. The Japanese took large banks (no foreign investors), and let them start up manufacturing businesses, which the government gave huge advantages and protected from foreign competition at home, while promoting their exports abroad.

    What they did not do, was let Ford set up car companies in Japan, and export them without taxation, or pay their workers a pittance.

    If they had done that, Japan would have never developed. And that is not 'boastful talk' and it most definitely was based on Japanese patriotism.

    Moreover, a chunk of government’s budget is sponsored by outside. That is, Zambia is still dependent on the good will and generosity of other non-Zambians. I am surprised at your boastful talk.

    That's because they are not benefiting from the mines anymore.

    'Goodwill and generosity'? Do you really think that western countries supply Zambia with $600 million a year because they feel sorry for it? Let me do the math, using 2004 figures.

    Zambia exports $4000 million in copper and cobalt, of which $2400 million is pure profit. If the Zambian government taxed that at 50%, they would collect $1200 million a year in revenues. Instead, they received $6 million total (this was before the windfall tax).

    Instead of receiving $1200 in taxes, they receive $600 million in 'donor aid', which unlike taxes, have strings attached.

    Now, do you still believe that Zambia 'is dependent on the good will and generosity of other non-Zambians'?

    Also, this so-called 'free market' government is doing nothing to reduce it's size. It still has 29 or so ministries and all kinds of political positions. They are having it both ways. On the one hand they are obstructing Zambians from getting the same benefits they give to foreign companies under the disguise of 'free markets', while on the other hand they tax the heck out of Zambian workers through PAYE and run a huge, bloated central state. If Zambians have such limited resources, how come they can keep 2/3 of this massive government running? (The other 1/3 coming from 'donor aid', which itself is a fraction of the profits made in the mining industry.)

    Also, what 'boastful talk'?

    Look, the world economy is proving every day that you cannot have capitalism without regulation, which is what has been promoted by Milton Friedman, the Bush Administration, the IMF/World Bank, etc.

    The only 'boastful talk' is of how markets are self regulating and don't need government intervention to function.

    What has the effect on poverty rates been of this economic boom? Did the number of people living under $1,- per day decrease at all?

    Which is what I mean - the MMD think it is enough to 'make work' and create the appearance of economic growth or rising GDP, even if that growth consists of profits made by foreign companies in Zambia, which are expatriated as soon as they are made and have zero effect on the economy.

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  11. coldtusker said,

    Free markets work.

    That is a statement of faith.

    If you let them. What happened in the USA was a result of government interference & policy.

    Actually it is the direct the result of the deregulation of the banking and mortgage industries.

    The way I see it, it also is the indirect result of NAFTA and the fact that the government encouraged manufacturers to seek out low wage countries for 'outsourcing', which directly undermined wages (demand) in the US, because as a result, wages fell or stayed stagnant. To compensate for the reduction of income that resulted from NAFTA, the the Federal Reserve (a privately owned company) decided to keep consumer spending going, by keeping interest rates artifially low, resulting in record levels of consumer credit and debt.

    At the same time, the reduction in taxes on the rich led to the mis-allocation of money to the stockmarket and realestate sectors, creating bubbles and excesses (like the Adjustable Rate Mortgage scam) which are now crashing.

    If you want to encourage spending and create demand for goods and services, get money to people who will spend it (the poor, working and middle class, who spend most of their income on food, energy, rent and clothes) and not to people who will put it in the bank or the stockmarket or buy houses with it for the purpose of investment or speculation (the rich).

    So it is neoliberal theory (free markets, privatisation, deregulation) which is directly responsible for the collapse of the world economy as we are witnessing it.

    At the same time, the only countries which are spared, are the ones with a lot of internal economic activity which is not dependent on global trade or western consumers, or the price of Saudi oil.

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  12. MrK,

    I completely disagree. Zambia has copper, and it had better sell that as dearly as it can.

    Well, how can Zambia do that now? The laws of demand and supply have stacked the odds very much against Zambia doing that in the current world economic conditions.

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  13. Zedian,

    And it didn't do so during good conditions because...?

    'Free markets' behind the closed doors of the Finance Ministry and the IMF have gotten us 'privatisation' of the mines, with a loss of billions to the Zambian taxpayer and economy.

    My prescription is that Zambia stops exporting, provide alternative jobs for the (merely) 58,000 miners in agriculture and on infrastructure projects.

    Save the mining equipment, take over mine ownership from any company that leaves the country. Future mines should be exploited on the behalf of the government, through mine management companies.

    I think when copper prices recover a little, it will be because of demand from China. They have the US dollars, and they still have a command economy, which is growing.

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  14. MrK,

    My prescription is that Zambia stops exporting, provide alternative jobs for the (merely) 58,000 miners in agriculture and on infrastructure projects.

    You said earlier that "Zambia has copper, and it had better sell that as dearly as it can." Now you suggest it stops exporting. Is that not contradictory?

    I think first and foremost we need to learn lessons from the past and as such we ought to realise that diversification is the key. We have seen enough evidence to suggest that copper commodity prices are too volatile for our economy to singly depend on.

    Secondly, the lifespan of mining is relatively short. If we do not diversify we soon we risk turning the entire Copperbelt into a ghost province.

    Thirdly, government taking over abandoned mines risks further worsening the economic crisis by giving false hope to the miners, while sinking millions of dollars in what may be currently unprofitable activities. Yes, the profits from copper boom time are long gone; way out of reach of the Zambian govt. I know how much you argued in favour of the govt reneging on the mining contracts to get a share of that and I concurred with you. However, that's fast becoming history, so we can only learn from that right now.

    I think when copper prices recover a little, it will be because of demand from China. They have the US dollars, and they still have a command economy, which is growing.

    I wouldn't bet on that at all. However big it might be, China is collectively a single market. In the short term, we shall have to probably put up with that, but I would suggest a longer term strategy where we have a diverse portfolio of exports to several regions. We have the land and the capacity to grow and export food. We don't we do it?

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  15. Zedian,

    You said earlier that "Zambia has copper, and it had better sell that as dearly as it can." Now you suggest it stops exporting. Is that not contradictory?

    Not if it only exports manufactured copper products. Cables, motherboards, etc.

    There is a connection between the fact that there is mass unemployment, and that Zambia exports raw materials.

    That's all I meant.

    We have the land and the capacity to grow and export food. We don't we do it?

    I'm all for that. One reason I could think of is that during the copper boom, profits were not invested in infrastructure and agriculture.

    But agriculture could be a huge growth sector. About 20% of arable land is under cultivation, and only 3% under permanent irrigation.

    Zambia could do a lot with on farm irrigation, we well as larger irrigation projects because of all it's river valleys.

    Lack of irrigation works are why there are floods every year.

    As it happens, miners are experts in moving earth, which would be handy in digging ponds.

    ReplyDelete

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