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22 December 2014
 
Consultancy Africa Intelligence (CAI) is a South African-based research and strategy firm with a focus on social, health, political and economic trends and developments in Africa. CAI releases a wide range of African-focused discussion papers on a regular basis, produces various fortnightly and monthly subscription-based reports, and offers clients cutting-edge tailored research services to meet all African-related intelligence needs. For more information, see http://www.consultancyafrica.com
 
 
   
 
 
Article by: Consultancy Africa Intelligence CAI
 
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Zambia's nationalised all of the key sectors of its economy in the 1970s, including the mining sector. However, a series of unfortunate events and wrong decisions on the part of the Zambian Government ensured the subsequent failure of the nationalisation programme. As such, this article will explore the factors that precipitated and led to the failure of the nationalisation programme by firstly setting the context in which Zambia nationalised certain sectors and then briefly discusses those factors.


The context for Zambia's nationalisation programme

 

In April 1968, Zambia's economic structure was changed with the Mulungushi Reform - the Government declared its intention to acquire equity holdings (at least 51%) in a number of key foreign-owned firms, that were to be controlled by a parastatal conglomerate named the Industrial Development Corporation (INDECO). Two years later, in January 1970, the Zambian Government acquired majority holdings in two of the major foreign mining corporations, namely Anglo American Corporation and the Rhodesia Selection Trust (RST), and they became the Nchanga Consolidated Copper Mines (NCCM) and Roan Consolidated Mines (RCM) respectively. These two corporations later (in 1982) merged to form Zambia Consolidated Copper Mines Ltd (ZCCM).

 

Historically, Zambia's economy has been based on the copper-mining industry. A decade after Zambia gained independence (in 1964), copper prices reached a high of US$ 1.50 (tripling its price in less than a year) and dependence on copper increased: copper mining accounted for a third of Zambia's GDP, 80% of its foreign exchange earnings and a third of its fiscal revenue. This revenue was utilised to centralise the economy and an ambitious social welfare and development programme was introduced. From the early 1970s, parastatals increased as the mining sector was nationalised (in conjunction with other sectors).

 

Developments slowed when the price of copper rapidly decreased after the first oil crisis in 1974. This forced Zambia to borrow money in order to maintain social provision. After the second oil crisis in 1979, interest rates drastically increased and resulted in a severe debt crisis. For the following two decades, Zambia's economy collapsed at an internationally unprecedented rate as copper prices continued to decline relative to the price of imports. Between 1974 and 1994, per capita income decreased by 50% and Zambia became the 25th poorest country in the world.

 

With such a high dependency on copper (both directly and indirectly), a sharp decline in the price of copper during the mid-1970s signified a national economic crisis for the African country - this disaster was also exacerbated by the fact that the Government believed that prices would soon rebound. Throughout the economic crisis, ZCCM was treated as a "cash cow" - drained without corresponding investment in machinery and prospecting ventures and little investment. With little being invested in exploration and drilling, as well as a lack of spares in equipment and machinery, no new mines were opened after 1979. The resources (or ore bodies) in the existing mines were found deeper and deeper, and consequently the cost of production rose. Moreover, copper production declined from a peak of 750,000 tonnes in 1973 to 257,000 tonnes in 2000. The rising cost of production was compounded by the fact that the decline in the copper price meant that the copper mining parastatal was losing US$ 1 million a day for the next three decades.

 

Consequently, the government borrowed money instead of restructuring the economy in order to lessen its dependence on copper. Concurrently, those sectors in which the Government did invest failed to produce viable alternatives. For example, a great part of the national budget was spent on establishing domestic self-sufficiency in manufacturing; however, the domestic market was too underdeveloped to sustain such ventures and operated at a loss.

 

Moving to Privatisation


By the mid-1980s, Zambia became one of the most indebted countries in the world, relative to its Gross Domestic Product (GDP). The International Monetary Fund (IMF) insisted that the country should introduce programmes aimed at stabilising the economy and restructuring in order to reduce dependence on copper. Proposed measures from the international financial institution included:

 

• ending price controls;
• the devaluation of the kwacha;
• cut-backs in government expenditure;
• cancellation of subsidies on food and fertiliser; and
• increased prices for farm produce.

 

However, Kaunda's removal of food subsidies caused massive increases in the prices of basic foodstuffs and the country's urbanised population rioted in protest. In desperation, Kaunda broke with the IMF in May 1987 and introduced a New Economic Recovery Programme in 1988. This did not improve the situation, however, and the Government moved towards a new understanding with the IMF in 1989.

 

In 1991, with the end of the Cold War, Kaunda was forced to make a major policy volteface and announced the Government's intention to partially privatise the parastatals. Furthermore, knowing that his authoritarian/socialist regime was under pressure with Mikhail Gorbachev's announcement of a perestroika and glasnost, as well as severe economic decline,(2) Kaunda called for multi-party elections and subsequently lost to the Movement for Multi-Party Democracy (MMD). In November 1991, the MMD's Frederick Chiluba was inaugurated as the first President of Zambia.

 

Chiluba's Government was committed to extensive liberal economic reform, with the help of the World Bank and IMF. The Government planned to privatise many state industries and maintained positive real interest rates; however, the President failed to privatise the parastatals for almost a decade while being in power. The privatisation of ZCCM (and the other parastatals) in the late 1990s enabled donors to once again support balance-of-payment payments. The privatisation of the parastatals, specifically the ZCCM, also increased foreign investments, most particularly from China.

 

During the 1990s, the Government attained increased control of its macroeconomic environment, as illustrated by its completion of the IMF's Poverty Reduction and Growth Facility Programme in 2007. Moreover, Zambia completed a Heavily Indebted Poor Countries agreement in 2005 and consequently qualified for the Multilateral Debt Relief Initiative in the following year. Foreign debt has been reduced by US$ 6 billion and subsequently freed resources for domestic re-investment and by 2008, the economy stabilised and began to reap the benefits of re-adjustment. By that time, Zambia had nine consecutive years of positive economic growth, averaging 5.5% from 2003 onwards.

 

Moreover, re-privatisation has had other positive outcomes for Zambia. For example, a recent article in Mining Weekly showed that Zambia's level of copper output in 2010 will be the highest achieved since 1973, and the country is on track to produce a million ounces of the metal by 2012.(3) Other positive outcomes include China investing in infrastructure development, such as constructing roads, dams, schools, health care facilities, as well as building the Chambishi Multi-Facility Economic Zone, rehabilitating the hydroelectric power plant at Kafue Gorge, establishing the Lumwana power project at Munwana mine, expanding the Lafarge Cement Plant and constructing the Government Complex building.


Factors that precipitated the failure of the nationalisation programme

 

As such, the factors that precipitated or led to the failure of Zambia's nationalisation programme, in particular the country's mining sector, comprise the following:

 

• Nationalisation of the mining sector in Zambia precipitating a decline in foreign investment and thus foreign exchange reserves;
• Centralising the economy which was compounded by a rising dependency on copper mining as corresponding (severe) economic decline;
• Two oil crises that led to Zambia's debt crisis;
• Decline in the price of copper that increased debt further;
• Government borrowing large amount of money from international financial institutions and did not use borrowed money on ways to restructure (and diversify) the economy so as to lessen Zambia's dependency on copper; or rather
• Government investing in the wrong sectors that failed to produce viable results/alternatives; and
• Zambia's Government treating the ZCCM as a "cash cow" and resulted in little investment in the mining sector - no new mines were opened and as a result, production costs increased as existing ore bodies were found deeper and deeper in the mines.



Concluding remarks


Zambia's nationalisation programme in general was ill-timed as the oil crises and the decline in global copper prices resulted in the African country's severe debt crisis. This was exacerbated by centralising the economy, thus increasing copper dependency and resulting in severe economic decline. Investment in the wrong sectors and no investment in the mining sector to open new mines led to production costs rising. This made exploiting resources in the existing mines that much more expensive. As such, all these factors led to the dismal failure of Zambia's nationalisation of its mining sector in particular, and the only way to rectify this was to privatise the industry in order to attract foreign investment.

Written by: Denine Walters (1)


NOTES:


(1) Contact Denine Walters through Consultancy Africa Intelligence's Eyes on Africa Unit (eyesonafrica@consultancyafrica.com).
(2) While the Zambian economy only grew about 30% between 1964 and 1974, it only grew a mere 13% over the following two decades.
(3) 'Zambia copper output to hit highest since 1973', Mining Weekly, 8 October 2010, http://www.miningweekly.com.

 

 

Edited by: Consultancy Africa Intelligence CAI
 
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