Privatization and Liberalization of The Extractive Industry in Zambia - Implications For The Resource Curse

PRIVATIZATION AND LIBERALIZATION OF THE
EXTRACTIVE SECTOR IN ZAMBIA
- IMPLICATIONS FOR THE RESOURCE CURSE
Mineworkers at a copper mine in Chambishi, Zambia. Credit: Christian Aid/David Rose
Master thesis, Aarhus University, Department of Political Science
Author: Christian Hallum Student number: 20041854 Thesis supervisor: Anne Mette Kjr Number of words: 35.877
Privatization and liberalization of the extractive industry in Zambia Implications for the resource curse
CONTENTS
LIST OF FIGURES AND TABLES ........................................................................................................................... 3 ABSTRACT ......................................................................................................................................................... 4 1. 2. INTRODUCTION .......................................................................................................................................... 5 THEORY: THE RESOURCE CURSE, OWNERSHIP, REGULATION AND POLITICS ............................................. 7 2.1. 2.2. Demarking the resource curse ........................................................................................................... 7 What causes the resource curse? ....................................................................................................... 8 Explanation 1: Neo-patrimonial politics and rent-seeking ..................................................... 10 Explanation 2: Lack of personal taxation ............................................................................... 12 Explanation 3: State-led industrialization ............................................................................... 13 Summing up: The three explanations of the resource curse .................................................... 14
2.2.1. 2.2.2. 2.2.3. 2.2.4. 2.3.
Challenges to the resource curse ..................................................................................................... 15 Empirical challenges tinkering with the statistics of the resource curse ............................. 15 Theoretical challenges to the resource curse .......................................................................... 17 Summing up: The challenges to the resource curse ................................................................ 19
2.3.1. 2.3.2. 2.3.3. 2.4.
Theoretical deliberations on ownership structures and regulation .................................................. 19 Theoretical expectations on the effects of ownership and regulation ..................................... 20
2.4.1. 2.5.
A theoretical framework for the analysis: Bringing politics back in ............................................... 24 Summing up: The theoretical approach .................................................................................. 27
2.5.1. 3.
METHODOLOGY ....................................................................................................................................... 27 3.1. 3.2. 3.3. Why and how to use the case study approach?................................................................................ 27 Why Zambia? .................................................................................................................................. 30 Operationalizations connecting theory with data ......................................................................... 32 National and private ownership .............................................................................................. 32 Privatization and liberalization ............................................................................................... 32 The resource curse and development ...................................................................................... 33 Specifying the boom periods .................................................................................................... 33
3.3.1. 3.3.2. 3.3.3. 3.3.4. 3.4. 4.
Summing up on the methodological approach ................................................................................ 34
ANALYSIS: COPPER BOOMS IN ZAMBIA THEN AND NOW - THE ROLE OF PRIVATIZATION AND LIBERALIZATION .............................................................................................................................................. 35 4.1. Comparing the economic management of the two booms ............................................................... 35 Boom 1: Nationalization, state-led industrialization and economic decline ........................... 35
4.1.1.
4.1.2. 4.1.3. 4.1.4. 4.2. 4.3.
Boom 2: Privatization, liberalization and macroeconomic stability ....................................... 39 The sustainability of the current model ................................................................................... 43 Summing up: The economic analysis ....................................................................................... 47
Political analysis: The dynamics of the curse under national and private ownership ..................... 47 The political dynamic during the first boom ................................................................................... 48 Nationalization and its effects on development coalitions ...................................................... 48 Summing up: The political dynamic of the first boom period.................................................. 54
4.3.1. 4.3.2. 4.4.
1991-2010: The privatization and liberalization agenda and its consequences ............................... 55 Part 1: Privatization and liberalization in the early 1990s - The state-donor coalition ......... 55 Part 2: Privatization and liberalization of the mines: Donor dominance ............................... 59 Part 3: The boom of the 2000s: Understanding the unsustainable development model ......... 60
4.4.1. 4.4.2. 4.4.3. 4.5. 4.6. 5.
Summing up: Booms then and now ownership and regulation as the missing piece ................... 66 Controlling for third variables: The effects of institutions .............................................................. 68
DISCUSSION: THE RESOURCE CURSE, OWNERSHIP, REGULATION AND POLITICS ..................................... 71 5.1. Inferring to the resource curse theory .............................................................................................. 71 Hypothesis 1: Unearned income is an independent and dependent variable .......................... 71 Hypothesis 2: Institutions are shaped by politics .................................................................... 73 Hypothesis 3: The political actors involved in resource-rich developing countries matter .... 75
5.1.1. 5.1.2. 5.1.3. 5.2.
Inferring to other countries .............................................................................................................. 77 The relevance of the neo-liberal extraction model of Zambia ................................................. 77 Hypothesis 4: History matter ................................................................................................... 81 Hypothesis 5: The problem of natural resources needs to be reframed .................................. 85
5.2.1. 5.2.2. 5.2.3. 6.
CONCLUSION............................................................................................................................................ 86
REFERENCES .................................................................................................................................................... 89
LIST OF FIGURES AND TABLES

Page Figure 2.1.: Schematic representation of the resource curse hypothesis Figure 3.1.: The methodological set-up of the case study Figure 4.1.: Average Annual Copper Prices, 1960-2008 Table 4.1.: Parastatals share of the Zambian economy, 1968-1972 Table 4.2.: Total capital investment in Zambia, 1954-1970 Figure 4.2.: Fiscal revenue from mining, 1980-2008 Table 4.3.: Key macroeconomic indicators, Zambia 1965-2009 Table 4.4.: Adjusted net savings for Zambia, 2001-2007 Table 4.5.: Taxes, grants and budget balance 2006-2007 Table 4.6.: Differences between period 1 and 2 Figure 5.1.: The causal effects of regulation and ownership on the resource curse Figure 5.2.: The relationship between politics and institutions Table 5.1.: Percentage of oil and gas production undertaken by foreign companies (by region) 10 29 34 36 37 40 42 46 61 68 73 74 78
ABSTRACT
Privatization and liberalization of the extractive sector in Zambia - Implications for the resource curse This thesis seeks to analyze what the effects of privatization and liberalization are on the occurrence and political dynamic of the resource curse phenomenon in developing countries. This is deemed highly relevant as the existing literature has not paid much attention to this issue despite the fact that many resource-rich developing countries have liberalized and privatized their extractive sector in recent years. Through an analysis of two separate boom periods in post-independence Zambia, it is shown that both in terms of the occurrence and political dynamic, privatization and liberalization can radically alter the resource curse phenomenon. Liberalization and privatization of the copper sector has brought about improved macroeconomic performance, and as such the curse does not seem to reemerge in Zambia. This is explained by exploring the changes in the political dynamics between the two booms. This analysis shows that the World Bank and IMF have been central in bringing about change in the second period, as have the new multinational mining investors. These actors are notable by their absence in the mainstream resource curse literature. While the hurtful dynamics of the resource curse do not reemerge after privatization and liberalization in Zambia, it is argued that the new situation is not sustainable in terms of development. Furthermore, it is argued that there is some tentative evidence showing that the findings from the Zambian case study can be inferred to a range of other resource-rich developing countries. Lastly, five hypotheses are developed. Together, these hypotheses challenge many of the key assumptions and understanding within the contemporary resource curse literature. The key message of the thesis is that ownership, regulation, and the political dynamics needs to be dealt with in order to improve our understanding of development in resource-rich developing countries.
1. INTRODUCTION
Since 2002 the global economy has witnessed a boom in the prices of natural resources larger than anything experienced since the 1960s and 70s. The price of oil, natural gas, and minerals are reaching new unprecedented levels as this is written, largely as a consequence of the expanding demand from China and other emerging economies (Mayer & Fajarnes, 2005: 14-15; Avendao et al., 2008: 11). Might this signal a new dawn for many developing countries? After all, approximately 29 percent of the poorest 1 billion people live in countries that are heavily dependent on exporting natural resources (Collier, 2008: 39). The windfall earnings from a booming natural resource sector could potentially help lift millions of these people out of extreme poverty. An influential strand within development studies brushes such optimism aside and warns that the current rise on commodity prices could as well be a false dawn (Collier, 2008: 2). According to this literature, countries that are reliant on natural resources experience lower growth (Sachs & Warner, 1995; Collier & Hoeffler, 2007; Kolstad, 2009), experience more armed conflicts (Collier, 2008: 38-56; Hilson & Machonachie, 2009: 60; Torvik, 2009: 248-250; Rosser, 2006: 9-10), and are less democratic (Rosser, 2006: 10). This counter-intuitive idea that resource-wealth hinders rather than promotes development has become known as the resource curse (Auty, 1993). So influential is this notion of a resource curse that it has arguably become conventional wisdom in much of academia, as well as among donors and NGOs working in resource-rich developing countries (Rosser, 2006: 7; Jones, 2008: 12; Bridge, 2008: 393). The resource curse builds its findings primarily on the experience from the boom in the prices of natural resources that occurred in the 1960s and 1970s (Oskarsson & Ottosen, 2010: 1068). With few exceptions, almost every resource-rich developing country in these years managed to turn the favorable situation of high prices for their prime exports into an economic disaster. It has increasingly been acknowledged that the explanation for this perverse outcome should be found in the political choices made during the boom in these countries (Rosser 2006: 14; Karl, 2007: 256). Perhaps then, one of the most important questions raised by the current boom in natural resources is whether the mistaken choices made during the boom in the 1960s and 1970s are likely to be repeated this time around. It is this question that is the main motivation for this thesis.
Several aspects have changed since the previous boom. While many factors could be analyzed, this thesis will argue that an issue that is both potentially highly relevant and at the same time highly understudied within the existing resource curse literature is that of ownership structures and regulation of the extractive sector. During the previous boom, national ownership of the extractive sector was the norm (Jones, 2005: 67). However, from the 1990s and onwards, there has been a major shift towards privatizing and liberalizing the extractive sector in developing countries (ibid.: 70). This shift could be highly relevant since the resource curse phenomenon assumes that the state has a high degree of political control over the extractive sector and receives large amounts of revenue from the sector (Luong & Weinthal, 2006: 242). Privatization and liberalization might affect the validity of these assumptions. Furthermore, while it is plausible that privatization and liberalization are important for the curse, it has so far received very little academic attention (ibid.; Jones, 2008: 21). From this it is hoped that the relevance of this thesis will be clear. Having laid out the motivation and relevance of this thesis, the research question which will guide this study can be specified in the following manner: What are the effects of privatization and liberalization of the natural resource sector for the occurrence and political dynamic of the resource curse? As will be argued in the methodological section, a suitable way of analyzing this question is through a case study of Zambia and its copper sector. The case study will compares Zambias experience during two separate booms, each with different ownership structures and regulatory environment. The thesis will be structured in the following manner. Following this introduction, chapter two will deal with the theoretical issues that this thesis raises. This will include a more thorough discussion of the resource curse literature. The theoretical approach to answering the research question will also be specified. In chapter 3 I will expand on the methodological arguments for choosing the single case study approach, why Zambia is an optimal case in this regard, and how key concepts are operationalized. In chapter 4 the analysis will be presented. This will deal with both the potential changes in the occurrence and political dynamics brought about by the change in ownership and regulation. Chapter 5 will discuss the implications of the analysis and will develop some tentative hypotheses from this. Lastly, some concluding remarks will be presented.
A key message to emerge from this thesis is that privatization and liberalization do have the potential to radically alter the resource curse phenomenon. The traditional understanding of the resource curse seems to be associated with national ownership and strict regulation. The fatal choices made during the previous boom do not re-emerge after privatization and liberalization in the Zambian case. As will be argued, however, privatization and liberalization do unfortunately not bring about a sustainable situation in terms of promoting development. The specifics of this argument and the wide implications it has for academia, donors, and resource-rich countries will hopefully become clear for the reader in what follows.
2. THEORY: THE RESOURCE CURSE, OWNERSHIP,

REGULATION AND POLITICS
In this chapter I will explore the theoretical issues that will need to be dealt with in order to answer the research question. This will involve five steps. Firstly, I will specify how I utilize the concept of the resource curse in this thesis. Secondly, I will present the explanations in the contemporary literature for why the resource curse occurs. Thirdly, I will discuss some of the criticisms leveled against the resource curse. Fourthly, I will discuss the theoretical expectations of privatization and liberalization on the occurrence and dynamic of the resource curse. Finally, drawing on the previous sections, I will develop my own theoretical approach to answering the research question.
2.1.
Demarking the resource curse
Paradoxically, as the resource curse has become conventional wisdom it has at the same time become less clear what is actually meant when referring to the resource curse (Jones, 2008: 37). While the claim originally was that natural resources brought lower growth rates to resource-rich countries, the literature has expanded to also cover the relationship between resources and conflict and authoritarianism, each spawning their own separate literature (Rosser, 2006). Additionally, it is unclear what is actually meant by natural resources. Some take natural resources to refer to all agricultural production, oil, gas, and minerals (see for example Sachs & Warner, 1995). Others argue that agricultural production should not be included (see for example Collier & Goderis, 2008: 7-10). Furthermore, while the initial work on the resource curse claimed general validity for all resource-rich countries, contemporary work focuses overwhelmingly on a sub-set of countries, namely the poorest developing countries rich in natural resources.
In order to analyze and discuss the resource curse it is therefore necessary first to clarify how the concept will be used. I take the resource curse to refer to the economic part of the literature, e.g. the claim that a reliance on natural resources tends to worsen economic performance. This is done in order to separate the complex interactions between economy, civil war, and democracy that otherwise occurs. In addition, using this narrow definition of the resource curse goes to the core of the problem, as the economic implications of relying on natural resources is arguably the central part of the literature. Additionally, I will take natural resources only to refer to non-renewable products, such as oil, gas, and minerals. I choose only to focus on these as it is increasingly acknowledged that the findings of the curse rely on these commodities, not the agricultural sector (Collier & Goderis, 2008; Bulte et al., 2003; Mehlum et al., 2006a). Furthermore, I choose to follow the contemporary writing on the curse in focusing on the poorest developing countries, mainly situated in sub-Saharan Africa and Latin America. This leaves out many important resource exporters, such as those in the Middle East. However, for analytical clarity this is deemed necessary. Also, as the policy implications drawn from the resource curse are overwhelmingly focused on the developing countries, it would seem most fruitful to focus on these countries. Having specified what the resource curse is and how I intend to utilize the concept in this thesis let me now turn to the issue of what the causes the resource curse.
2.2.
What causes the resource curse?
In order to assess how privatization and liberalization might affect the resource curse phenomenon we first need a clear understanding of how the curse operates. Providing such an account is the purpose of the following. The early literature on the curse was mostly interested in establishing whether there was a curse, which they generally found support for (Sachs & Warner, 1995; 2001). The curse was mostly explained with reference to purely economic factors. The main explanation to come out of this strand of literature was the Dutch disease effect. According to this explanation, growth is lowered by the influx of foreign currency during a resource boom, leading to an appreciation of the local currency, which renders local manufacturing and agriculture uncompetitive in the global market (Sachs & Warner, 1995). Another explanation during this phase of writing was that the volatile prices of natural resources hurt economic progress due to increased investment risks and problems of macroeconomic management (Van der Ploeg & Poelhekke, 2009). These economic explanations are today regarded with some skepticism (Rosser, 2006: 14). All countries rich in natural 8
resources have had a large influx of foreign currency and have faced volatile prices, but their experiences varies enormously, a fact that the economic explanations provide little insight into (Jones, 2008: 15). A consensus is therefore emerging that economic explanations cannot be the whole story and in themselves do not explain much (Bulte, 2005: 1030; Kolstad & Wiig, 2009: 5318; Boshini et al., 2007: 596-597; Caselli & Cunningham, 2009: 629; Sachs, 2007: 181). Instead, a consensus has emerged that the resource curse is caused by poor economic management and thus invariably involves the political system (Rosser 2006: 14). As Karl notes: The resource curse is primarily a political and not an economic phenomenon (2007: 256). As a result, this thesis will not focus on these purely economic explanations, but will instead give attention to the politics behind the curse. Politics is also key concern for the more contemporary writing on the curse. This part of the literature argues that the problem of resource-wealth can be traced to the amount of rents and unearned income generated by the natural resources (Collier & Hoeffler, 2007: 18; Jones, 2008: 2021; Moore, 2004: 304-305; Kolstad & Wiig, 2009). Rents can be defined as returns to capital that are in excess of costs and above the profit rate that can be acquired from regular market activities (Kolstad & Wiig, 2009: 5317). Due to market imperfection, the extractive industry is renowned for its potential for high rents during a boom period (Jones, 2008: 7). A common, although often implicit assumption of this line of thinking is that these rents spill over into the political system through taxation as unearned income (Karl, 1997: 48-49; Collier & Hoeffler, 2007: 7; Robinson et al., 2006: 449). Unearned income is government revenue that the state acquires with little or no organizational and political effort, and with little effort in relation to their domestic population (Moore 2004: 304). Unearned income is then taken to be the defining characteristic of the state in resource-rich developing countries (Karl, 1997: 48-49). The problem of unearned income is assumed to arise in the crucial period in which the prices of the resources increase rapidly, a so-called boom period (Collier & Hoeffler, 2007; Tornell & Lane, 1999). In such a period it is assumed that both rents and unearned income increases rapidly (Auty, 1993: 18; Karl, 1997: 48-49; Jones, 2008: 15). As I will demonstrate in the sections that follow, for most of the current writers on the resource curse it is this characteristic of high rents and unearned income during a boom period that produces the negative effects of the resource curse.
This, however, does not explain why some countries with natural resources have succeeded while others have not. To explain this, the contemporary writers on the resource curse invoke institutions as the missing link in the explanation. According to this line of thinking, unearned income only becomes a problem under conditions of weak institutions (Jones, 2008: 13) - a notion that has been confirmed through several statistical tests (Bulte et al., 2003; Boschini et al., 2007; Collier & Hoefler, 2007; Tornel & Lane, 1999; Mehlum et al., 2006a; Robinson et al., 2006; Kolstad & Wiig, 2009) and case studies (Auty, 1994; Karl, 1997). The literatures understanding of good institutions reflects the standard good governance notion, highlighting as it does the importance of the rule-oflaw, transparency, accountability, and checks-and-balances (Jones, 2008: 14). Figure 2.1 replicates the contemporary explanation of the resource curse in a simplified manner. Figure 2.1.: Schematic representation of the resource curse hypothesis
Institutions
Natural resources
Rents
Unearned income
Political dysfunctions
Economic dysfunctions
Figure 2.1. shows that the political and economic dysfunctions become worse as institutional quality becomes worse, and conversely, improves as institutional quality becomes better. But how exactly does rents and unearned income produce political and economic dysfunctions? I will argue that there are three main explanations for this in the contemporary resource curse literature. While not an extensive list of all explanations presented within the literature, each of these three explanations have been supported by several writers within the resource curse literature, have been widely cited, as well as being reflected in donor initiatives to counter the resource curse. As such, I judge these to be the three most common and influential explanations1. 2.2.1. Explanation 1: Neo-patrimonial politics and rent-seeking According to the first explanation, unearned income is assumed to have two effects on the political system. Firstly, mining revenues alter the framework for decision-making among politicians, making redistributive neo-patrimonial politics more likely (Karl, 1997: 44). Secondly, rent-seeking
1
For alternative literature reviews of the resource curse see Rosser, 2006, Bulte et al., 2003: 4-11.
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activity increases, whereby domestic actors try to extract revenue from the state rather than engage in productive economic activity (Kolstad & Wiig, 2009). These problems arise where institutions are weak (ibid.). The distinction between neo-patrimonialism and rent-seeking is thus that the first refers to the states reaction to the windfall and the second to the reaction of individuals or groups in society (Kolstad & Wiig, 2009: 5318). Concerning the first model, neo-patrimonialism sees the political system as a mix of patrimonial and legal-bureaucratic rule, two of Webers classic ideal types of governance. In the patrimonial model power is completely personalized in one ruler and hence a distinction between the public and private cannot be made. In the legal-bureaucratic model power is vested in formal rules and administered by a professional and legally bound bureaucracy (Erdmann & Engel, 2006: 18). While acknowledging that neo-patrimonialism as a concept is not confined to resource-rich developing countries, writers on the resource curse highlight that the vast amount of unearned income accruing to the government has the effect of making neo-patrimonial politics all the more likely in these societies (Karl, 2007: 262). Neo-patrimonial politics is based on the assumption that political leaders will try to maximize their time in office. The windfall that accrues to the state during a boom in the prices of natural resources lets the political leaders to rely on redistributive politics in order to secure support, rather than focusing on creating economic growth (Kolstad & Wiig, 2009: 5318-5319; Karl, 1997: 41). Consequently, resource-rich states do not need to formulate anything deserving the appellation of economic policy; all [they need] is an expenditure policy (Rosser, 2006: 16). This creates several problems. Firstly, the redistributive politics can create large amounts of corruption when there are few institutional controls on the political system, which in turn weakens economic performance (Sala-i-Martin & Subramanian, 2003). Secondly, the large and sudden increase in public spending and investment as redistributive policies are implemented has the effects of overheating the economy, thereby creating large inefficiencies and inflation (ibid.; Karl, 1997: 28). This is so since revenue tends to be spent at a pace which is economically unsound, a phenomenon which has been termed the voracity effect (Tornell & Lane, 1999). Thirdly, the massive redistributive policies tends to create unsustainable debts, as public investments are financed on the projection of future earnings from the resource sector, and new spending proves difficult to scale back once revenue from the natural resource boom dry up (Karl, 1997: 29-30;
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Auty, 1993). These three effects have received support through numerous empirical studies (Robinson et al., 2006: 448; Torvik, 2009: 246; Tornell & Lane, 1999). According to the second model, the rent-seeking explanation, non-state actors will attempt to obtain some of the massive revenue flowing into the state after a boom (Karl, 1997: 56; Mehlum et al., 2006b). Under condition of weak institutions, entrepreneurs will spend less time on productive economic activity and more time trying to extract revenue from the political system (Mehlum et al., 2006b: 1121). This bottom-up approach highlights that the increase in public spending following a boom is also driven by a demand from the population and adds a negative outcome to the list of ills already described by the neo-patrimonial explanation, namely that productive entrepreneurial activity is lowered (ibid.: 1122). 2.2.2. Explanation 2: Lack of personal taxation The second contemporary explanation of how resource-rich countries fail to develop is focused on tax structure: a weak (or nonexistent) tax regime is viewed in the resource curse literature as perhaps the most prevalent negative outcome of resource wealth (Luong & Weinthall, 2006: 251) This explanation is centered on the notion that [t]he revenues a state collects, how it collects them, and the uses it puts them to defines its very nature (Karl, 2007: 259). This line of thinking lends from Tillys influential work on state-building (ibid.: 260). According to this, modern states emerged in Europe due to the pressures imposed on the state in order to finance itself. This produced the need for taxing the population, which created two effects. Firstly, it necessitated bargaining with the population as subjects were more likely to pay their taxes if they felt that the state had legitimacy, bringing about demands for representation in exchange for taxation, thereby helping in bringing about modern representative politics (Moore, 2004: 302). Secondly, the demanding task of collecting tax made it necessary for the state to build a modern bureaucracy (ibid.: 298). In the resource curse literature, these effects are then contrasted to the situation in resource-rich developing countries. Here it is assumed that the high degree of natural resource wealth means that resource-rich states are relieved of the burden of having to tax their own subjects (Karl, 2007: 256).
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Having been relieved of this burden, these states not only fail to build modern bureaucracies, but also fail to enter into bargaining over rights with their population (Moore, 2004: 313; Collier & Hoeffler, 2007: 11). Instead the resource-rich states enter into bargaining with foreign companies, thereby creating a centralized state (Karl, 2007: 262-263). This problem of centralization and lack of bargaining with the population is strengthened as there is also a lack of demand for government accountability from the population, as this demand is assumed to be the outcome of citizens being provoked into scrutiny [of the government] by taxation (Collier & Hoeffler, 2007: 11-12). The effects on economic performance of these tendencies are dismal, according to the curse literature. The lack of accountability produces few checks and balances on the political system, which has been shown to be one of the most important institutional factors in determining whether resources become a curse or a blessing (Tornell & Lane, 1999: 42; Collier & Hoeffler, 2007). Furthermore, the lack of a modern bureaucracy and checks and balances on the political system reinforces the problem of neo-patrimonial politics, as described above. Lastly, the lack of a modern bureaucracy produces a state which is ill-equipped for implementing programs for economic and social development (Karl, 1997). 2.2.3. Explanation 3: State-led industrialization The last explanation in contemporary writing is focused on how rents and unearned income promote a highly statist approach to industrial policy, including strategies of import substitution industrialization (ISI). This hypothesis gained support by Sachs and Warners groundbreaking statistical tests, which found that countries that are reliant on natural resource exports tend to have more protectionist trade policies (1995: 19-21). Auty notes that most developing countries in the 1950s and 1960s adopted a statist approach to development. However, he also demonstrates that resource-poor countries abandoned their statist policies in favor of more market and export-oriented policies much earlier than their resource-rich counterparts. The key to understanding why resource-rich countries sustained their economically hurtful statist policies, Auty argues, was the easy access to foreign exchanges from the natural resource sector (Auty, 1993: 257; Auty, 1994: 24). Import-substitution can only continue as long as the state has access to foreign reserves, which is predicated on a strong exporting sector. This
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relieves the pressure to promote a competitive manufacturing sector (ibid.). At the same time, the longer import substitution is tolerated, the more entrenched these special interests become, and hence make adjustment towards competitive manufacturing more difficult with time (ibid.). Others have found support for this argument through case studies (Karl, 1997: 25; Karl, 2007: 264; Doner et al., 2005: 328). Adding to Autys argument, these other writers not only focus on foreign reserves, but also on the states revenue base, arguing that the easy access to unearned income in resource-rich countries make state-led industrialization more plausible in these countries, to the detriment of long-term development (ibid.). Unfortunately, due to the two other explanations mentioned in the previous sections, the resourcerich states were ill-equipped at implementing industrial policies as they lacked an efficient bureaucracy, a political system that could keep politicians accountable, and at the same time faced a rent-seeking population, as well as incentives to promote unsustainable neo-patrimonial redistributive policies. The state-led industrialization programs were therefore a failure in most resource-rich countries, leaving a legacy of debt, inflation, and a bloated state, rather than a competitive manufacturing sector. 2.2.4. Summing up: The three explanations of the resource curse Drawing on all three explanations presented above, the fate of resource-rich developing countries indeed seems cursed. This is not least the case since all the explanations have been verified empirically in the scholarly work cited in the previous three sections. Below I will highlight a few of the main points to come out of the three explanations. Firstly, all three explanations provide a strong argument for the primacy of politics and institutions in determining whether the resource curse becomes a problem or not. All point to the causal mechanisms pointed out in figure 2.1., namely that the influx of unearned income into the state sets in motion a process of political dysfunctions, which lead to economic dysfunctions. The quality of the countrys institutions alone determines how widespread the political and economic dysfunctions become. Since all three explanations point to the importance of the political dynamics set about by a boom period, this thesis will also focus on this area, which is reflected in the research questions attention to political dynamics. Secondly, it should be clear from the three explanations that although they vary, they still share some basic assumptions. Thus, they all share the assumption that rents spill over into the political
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system as unearned income, and that this is the core problem of the resource curse. This has meant that the resource curse is overwhelmingly focused on sanitising the political effects of resource rents in their policy prescriptions (Jones, 2008: 36). Furthermore, they all share the view that the political and economic dysfunctions arise during the boom period. Equally, all three explanations treat the state as the main political actor in resource-rich countries (Jones, 2008: 22). While the rentseeking and personal taxation explanation both give some attention to the interaction of state and society, they still assume that the state can ultimately decide on its development strategy, taxation structure, and spending policies.
2.3.
Challenges to the resource curse
While the previous sections have shown that there is somewhat of a consensus on the empirical reality of the resource curse, and the primacy of institutions in explaining whether it emerges or not, it should be noted that the resource curse literature has in recent years increasingly come under pressure from dissenting voices. As this thesis also seeks to engage critically in the debate on the resource curse it is relevant to expand on these points of criticism, which will also help in developing the theoretical approach taken to the research question. The resource curse literature has been challenged on a range of areas where two stand out as critical. The first is on the question of the validity and reliability of the results from the statistical part of the resource curse literature. Secondly, the literature on the resource curse has also increasingly been criticized for its lack of a coherent theoretical framework. These challenges question the central part of the consensus on the resource curse today, namely that institutions are the missing link in explaining the resource curse phenomenon. This thesis shares the skepticism of explaining the resource curse with reference to the quality of institutions, and the policy implications that follow from this. As such, it is worth exploring these arguments in greater detail. 2.3.1. Empirical challenges tinkering with the statistics of the resource curse While several case studies have found support for the resource curse hypothesis (Karl, 1997; Auty, 1993; 1994) it should be noted that the theory had its major breakthrough with the adoption of the cross-country statistical tests employed by most contemporary writers on the curse. It is to this statistical approach that the concerns over reliability and validity are primarily aimed. Both the claim that resources promote conflict and authoritarianism has been shown to be sensitive to the data used and the measures employed (Oskarson & Ottoson, 2010; Wacziarg, 2009;
15
Rigterink, 2010; Basedau & Lacher, 2006; Nathan, 2005; Ross, 2010). Most importantly for the purpose of this thesis, the claim that natural resources worsen economic performance has also been challenged (Norrbin et al., 2008; Rambaldi et al., 2006; Brunnschweiler, 2008; Stijns, 2005). These many empirical challenges are mainly a result of tinkering with the statistical model used for testing the resource curse hypothesis. By including more years or adding or dropping cases, the curse can suddenly disappear or look more like a blessing2. Additionally, by using different measures for either natural resources or development, results have been produced that contradict the resource curse, sometimes showing a strong and positive influence of natural resources on economic development (Stijns, 2005; (Brunnschweiler, 2008). The discussion on the best measures, or proxies, for testing the resource curse has mainly evolved around the question of whether to use a measure of natural resource export dependence or natural resource stocks. Using the former generally shows there being a curse, while using the latter generally shows that there is no curse. It is unclear, however, that natural resource stocks is a good measure since it does not indicate whether resources are being extracted and hence have entered into the economy (Moore, 2007: 21; Kolstad & Wiig, 2009: 5324). However, the export measure is not ideal either as there are concerns of endogenity. Thus, it might be that the causality runs from weak economic growth to primary export dependence instead of the other way around (Jones, 2008: 19, 25-26 & 32; Rosser, 2006: 12). Consequently, as both dependence and abundance are flawed measures of resource-wealth, several authors point out that the best measure would be the amounts of rents generated by the natural resources, but there is no good data on this (Jones, 2008: 20; Kolstad & Wiig, 2009: 5324). However, even a measure of rents might be problematic from a theoretical standpoint, as the current literature focuses more on the amount of unearned income than rents. It is assumed that there is a straightforward relationship between rents and unearned income, but this might not be so. Thus, the amount of unearned income received from the rents produced in this sector is mediated by local tax laws and their enforcement, and hence rents can for example be high while unearned income is relatively low due to liberal regulation, or vice versa. The best measure would therefore be unearned income, but unfortunately data on this is difficult to access, as the extractive industry is
For example, Norrbin et al. show that excluding a single country from the dataset used by many of the writers on the curse literature can render the correlation between natural resources and growth insignificant (2008: 191).
16
renowned for its lack of transparency (Oskarson & Ottosen, 2010: 1072; Shaxson, 2007). Thus, it would seem that statistical tests of the resource curse are condemned to rely on proxies that at best are doubtful. This does not imply that the resource curse can be discarded. As noted, several case studies have shown that natural resources can in fact produce negative outcomes (Auty 1993; 1994; Karl, 1997). However, it does mean that the many statistical studies, on which the argument of the primacy of institutions largely hinges, are subject to reliability and validity problems. As such, we should therefore not accept the resource curse as an empirical fact. The implications are twofold. First, as the studies showing the importance of institutions has largely been driven by statistical studies, we should probably treat this claim with caution. Secondly, as good proxies are lacking, the statistical approach might not be the best way of exploring the resource curse. Taking these two implications together, I argue in this thesis for an approach that is skeptical of the importance of institutions, and which adopts the case study methodology rather than the statistical approach. 2.3.2. Theoretical challenges to the resource curse The literature on the resource curse has also increasingly been challenged due to its overemphasis on correlation instead of causality (Rosser, 2006: 12). As noted earlier, the contemporary writers on the resource curse have attempted to eradicate this shortcoming by invoking institutions as the missing link. However, for some this has not been enough. This should come as no surprise as the way institutions are utilized in the literature is reminiscent of the good governance approach to development (Jones, 2008: 6), which since its inception has been criticized for its lack of theoretical grounding. As the concept of good governance does not come with a clear definition, it can be difficult to capture what is actually meant by the term (Grindle, 2004: 526). It has been charged that this has made it difficult to use the good governance approach for clear and meaningful policy prescriptions (ibid.). This is also seen in the contemporary writing on the curse, where numerous proxies have been used to measure the elusive good institutions3. It is very rare to see any theoretical justification for using one measure of institutions over another in the literature, and very rarely is the precise causal mechanism tested. The overwhelming number of
3
Examples include the rule of law (Kolstad, 2009: 441), freedom of the press (Kolstad & Wiig, 2009), elections (Collier & Hoeffler, 2007), and checks and balances (ibid.).
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articles written on the curse is thus still more interested in presenting correlations rather than developing a coherent theoretical framework for understanding the causal mechanisms of the curse (Basedau, 2005; Jones, 2008; Rosser, 2006). More seriously, it has been questioned whether the institutional approach has any meaningful implications for resource-rich developing countries. Thus, it has been found that the institutional quality needed to overcome the curse is staggeringly high. One author finds that institutional quality has to reach the level of OECD-countries in order to lift the curse, which leads him to speculate whether the policy recommendations flowing from the resource curse literature have any practical meaning for developing countries: the data indicate that institutions play no significant role in neutralizing the resource curse precisely in the developing countries, where the resource curse is commonly thought to exist (Yang, 2008: 62). Another author finds that out of a sample of 87 rich, middle income and low income countries, only 15 have high enough institutional quality to reverse the resource curse, again indicating the high level of institutional quality needed (Torvik, 2009: 248). This is worrisome as it suggests two things. First, it makes the good governance approach seem less fruitful in providing any meaningful policy implications to the developing countries, where the issue of the resource curse is most pressing. Second, it seems plausible that good institutions might actually function as a proxy for developed nations, thereby measuring the outcome of development rather than its cause (Grindle, 2004: 531; Chang, 2003: 117). This is, however, not the only problem of the institutional approach to the resource curse. A worrisome finding from the contemporary writings on the resource curse is that abundance of natural resources tends to erode institutional quality in itself (Collier & Hoeffler, 2007: 30; Bulte et al., 2003: 20). This is understandable from the three explanations of the resource curse presented earlier, which all highlight how politicians face incentives to prioritize spending over state-building. But if natural resources erode institutional quality, how are poor countries expected to break out of this negative spiral? This question is left somewhat open by the literature, which has little to say on how to change the dysfunctional political dynamics that sustain bad institutions.
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What we have is therefore a theory that might be able to explain variance on a global scale to some degree, but which provides few policy implications that seem politically feasible to the poor countries (Rosser, 2006: 26). 2.3.3. Summing up: The challenges to the resource curse The points above suggest that the empirical foundation of the contemporary resource curse literature is weaker than is generally assumed, both in terms of reliability and validity. Perhaps more seriously, the theoretical explanation of the institutional approach also seems wanting in several regards. Two implications of the above follow for this study. Firstly, due to the shortcomings described in the paragraph on the statistical approach to investigating the resource curse, a case study approach will be adopted instead. This will hopefully ensure that the link between unearned income and the political dynamics can be investigated in a more thorough way, without having to rely on weak proxies. Secondly, as I have argued that the institutional approach to investigating the resource curse does not seem satisfactory, I will instead focus on the issues of regulation and ownership structure within the extractive industry. In what follows, I will discuss why and how ownership structure and regulation might affect the resource curse in order to inform the analysis that is to follow.
2.4.
Theoretical deliberations on ownership structures and regulation
In the above it was argued that the institutional approach of the mainstream resource curse literature has several shortcomings. As a consequence, this thesis seeks an alternative route to exploring the resource curse. This will be focused on the effects that privatization and liberalization has for the occurrence and dynamic of the curse. In order to inform the analysis, let me briefly reflect on what the effects of liberalization and privatization might be on the resource curse. While recent writing on the resource curse has focused extensively on the good governance type institutions and their role in mediating the effects of the resource curse, it is noteworthy that very little attention has been given to the institutional arrangement within the extractive sector. Luong and Weinthal note that the lack of studies on the issue of ownership can be traced to a common, although not always explicit assumption within the resource curse theory, namely that state ownership prevails in developing countries. As a consequence, ownership structures have largely been ignored in the current literature on the resource curse: 19
Economists and political scientists alike have largely ignored the structure of ownership over mineral resources as either a cause of the resource curse or a possible solution. The main reason for this omission is the prevailing assumption within the literature that mineral wealth is always and necessarily state-owned and centrally controlled. (2006: 243) Furthermore, the authors note that the assumption of state ownership and control within the literature is caused by the retrospective nature of much of the resource curse literature, focusing as it does on the period preceding the mid-nineties: This widespread assumption [of state ownership] is both fostered and reinforced by the fact that most of the literature on the resource curse focuses on the same historical periodroughly from the late 1960s to the early 1990sduring which the vast majority of mineral-rich countries exercised state ownership over their mineral reserves. (ibid.) The problem with this assumption, as will be shown in the analysis and discussion, is that ownership structures and regulation within the extractive sector in developing countries has changed significantly from the 1990s and onwards. The change consists of a shift from national ownership and strict regulation towards private foreign ownership and liberal regulation of the sector. The resource curse literature still has not grappled with the consequences of this major shift, but has instead begun to give policy prescriptions to developing countries based on the experiences from previous decades under state ownership. However, the question of whether we can infer from the past to present, when ownership structure and regulation has changed significantly, looms. It is to this question that the thesis wishes to contribute. In order to inform the analysis I will now outline the theoretical expectations of the effects of privatization and liberalization on the resource curse. 2.4.1. Theoretical expectations on the effects of ownership and regulation How might different types of ownership and regulation affect the resource curse phenomenon? Below I will reflect on this question and thereby inform the focus of the analysis that is to follow.
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Auty points to a wave of nationalizations of mining firms in developing countries which reached a peak in the late 1960s and early 1970s (1993: 27). The effects of this, he argues, were that management of the resource sector deteriorated, as the sector was steered away from commercial interests to political (ibid.). This interpretation raises the prospect that at least some of the problems of the resource curse can be traced to bad management in the resource sector as a consequence of state-ownership. Theoretically we might then expect that privatization of the resource sector could help in bringing in more competent management that could withstand the harmful effects of political interference. As was noted in the previous sections, the root of the resource curse problem has been described as the political control over rents from the extractive sector. Privatization might reduce this problem by limiting the politicians possibility of using the extractive companies as their personal cash cow, thereby reducing corruption and improving transparency in the sector. Privatization also creates strong non-state actors in the form of the private companies that carry out resource extraction. One possibility could be that these companies would have a vested interest in sustaining a free market structure which could benefit national development and do away with the statist approach to development. Furthermore, liberalizing the regulation of the sector might also have positive effects. Thus, reducing the tax burden on the sector through liberalization of the tax code might help ensure that the negative effects of unearned income accruing to the state are dampened. Forceful as the above theoretical arguments are in favor of a positive effect of privatization and liberalization, counter arguments can also be made. Stiglitz thus notes that undertaking the task of privatizing the extractive industry can be difficult for any state, especially if state institutions are weak (2007: 23). Privatization can produce increased opportunities for corruption, both in the privatization process itself and in the subsequent relationship between the new private owners and the government (ibid.). Privatization and liberalization can especially become problematic if the process is viewed as illegitimate by the wider population, an example being if the state-owned companies are sold below market value or if regulation is limited (ibid.: 35). In this situation the extractive companies will face uncertainty in their property rights and regulation and can therefore engage in asset stripping, or build corrupt relationships with government in order to secure that changes are not made to their regulation, despite popular pressure (ibid.).
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Additionally, while it might be an advantage that liberalization dampens the effect of unearned income on the political system, for example through reform of the tax code, it should at the same time be clear that the solution to the resource curse is not to completely forego any tax revenue from the resources. It might be then that liberalization and privatization can reduce the tax-take from the sector below a socially acceptable level, which could produce an unsustainable situation in terms of long-term development. Equally, while the stream of unearned income might be reduced, this does not necessarily mean that corruption and rent-seeking will also decrease. This follows from the observation that the size of rents and the opportunities for rent-seeking are not proportional: van de Walle has made the crucial point to discriminate between rent and rentseeking... Rents can decline while rent-seeking is increasing. Privatisation and liberalisation might reduce the amount of rents, but increase rent-seeking... (Erdmann & Engel, 2006: 27) Privatization and liberalization involves complex negotiations between the government and the private companies, not only as a one-off negotiation of the privatization process itself but also in continuing negotiations over the regulation of the sector. These negotiations might create opportunities for rent-seeking both for a corrupt government and for the private companies that wish to reduce regulation. This point is also acknowledge by Karl, who notes that the neoliberal approach of shrinking the jurisdiction of the state might limit some of the negative effects described by the resource curse theory, but at the same time not solve the underlying problems of weak state capacity: the overriding neoliberal preoccupation with shrinking the jurisdiction of the state ignores the crying need to strengthen its authority. Predation is not simply a function of state size. Although the removal of regulations, price controls, tariff barriers, and the like may eliminate some of the arrangements that have fostered rentier behavior, there is no guarantee that a more minimalist state will not simply revert to new rentier arrangements in the future, especially if new booms occur. Nor is there any guarantee that rentier havens will not simply relocate elsewhere, for example via the privatization process (1997: 241-242)
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Keeping these theoretical arguments in mind, we are thus cautioned about the prospects of solving the resource curse problem through privatization and liberalization. Notice, however, that the arguments for and against privatization and liberalization of the resource sector are relatively abstract. For example, Karl notes in the quote above that a new minimalist state might revert to new rentier arrangements, while not specifying what these arrangements might look like. Equally, Erdmann and Engels point on the difference between rents and rent-seeking does not give us any clues as to how rent-seeking might continue despite rents falling in size. This lack of knowledge can be traced to the very limited attention that the issues of privatization and liberalization have received in academic writing on the curse (Luong & Weinthal, 2005). The lack of attention to these issues is somewhat of a paradox as the arguments presented in this section show that privatization and liberalization goes to the core of the resource curse, namely the amount of unearned income accruing to the state and the amount of political control over the sector, main issues in all three contemporary explanations for the curse presented earlier. Instead, much of the literature has assumed that there is a straightforward relationship between natural resources and unearned income: it stands to reason that the volume of resource rents going to the public purse is not manna from heaven but rather reflects complex endogenous processes, including how resource contracts are negotiated and the nature of foreign involvement in the sector. To this authors knowledge, no study seems to have adequately addressed this issue either theoretically or empirically. (Jones, 2008: 21) Having read through large parts of the curse literature, I share Jones assessment of the lack of both theoretical and empirical studies that treat unearned income as a dependent variable itself, rather than assuming that all resource-rich countries are characterized by seemingly endless streams of government revenue from the resource sector, while having large political influence over the extractive sector. Therefore, this thesis will try to go beyond the sketchy theoretical arguments made above, and through grounded empirical analysis hopefully provide new insights into how privatization and liberalization affect the occurrence and political dynamic of the resource curse.
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Having now made the argument for focusing on privatization and liberalization of the resource sector, the question of how to do this in a theoretically sound manner arises. This question will be pursued in the next section.
2.5.
A theoretical framework for the analysis: Bringing politics back in
So far, it has been argued that instead of focusing on institutions as the only factor influencing the curse, we should guide our attention to the issues of privatization and liberalization of the extractive sector. In specifying the best theoretical approach to studying these issues, two broad implications can be drawn from the above sections. Firstly, a grounded approach is needed, by which is meant an approach that gives attention to the causal mechanisms involved in the curse. This follows from the point that the preoccupation with statistical studies on the curse has been inadequate in this regard. This also follows from the fact that our existing knowledge of how privatization and liberalization affect the curse remains weak, as pointed out in the previous section. Secondly, we will need to give attention to the political dynamics involved in the curse. This follows from the observation that all three of the existing explanations for the curse point to the political dynamic as essential for understanding the curse phenomenon. However, the way in which politics has been utilized in the existing curse literature does not constitute a coherent theoretical approach and as such needs some further remarks. Let start by clarifying what is meant by the concept politics. In line with the tradition of Easton, politics can be defined as involving the activities of conflict, cooperation and negotiation involved in the use, production and distribution of resources and is arguably central to any development process as this itself involves new ways of using resources (Leftwich, 2000: 5). As was apparent from the theoretical deliberations on the effects of privatization and liberalization, the issues of ownership and regulation have large implications on politics in this sense, since they involve a restructuring of the distribution of rents from the sector, as well as managerial control. As such, regulation and ownership are inherently political and therefore, a theoretical approach that is centered on politics is deemed relevant. The attention to politics also follows a general trend in development studies, in which politics has been given a more central role by a range of authors recently. In this regard, a central insight is that
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the state cannot be assumed to have autonomy from society. Instead, state action is seen as an outcome of interaction between state and actors internal or external to society (Leftwich, 2000: 96). A particularly insightful contribution to this line of thinking is Donor et al.s focus on growth coalitions, where it is stressed that the state often enter into coalitions with non-state actors in order to govern, and that the nature of these coalitions determine development outcome (Donor et al., 2005). Central to this approach is the claim that state autonomy cannot be assumed, as the resource curse tends to do. Instead, politics is seen as a complex interaction of actors, the state being only one among others. This thesis adopts this theoretical approach. From this, the question of which non-state actors to include in a political analysis of resource-rich societies arises. I will argue that there are at least four such actors that need to be included. Firstly, there are the companies that carry out the resource extraction. Secondly, there are the donor community, especially the World Bank and IMF. Thirdly, there are the societal groups in the resource rich countries that have a personal stake in the resource extraction. Lastly, the state is of course still a central actor and as such will also be analyzed. Below I will argue for the inclusion of each of these actors. Concerning the companies it should be clear that if politics involve the struggle over the distribution of resources, they are indeed highly involved in politics. This is the case since resource extraction involves negotiations over contracts and regulation with the state in order to secure the right to resource extraction and the terms of this extraction, which have implications for the distribution of resources between the company and the state (Stiglitz, 2007: 23). This characteristic of the extractive industry is due to the legal principle by which natural resources fall under the ownership of the sovereign state4, which means that resource extraction is always within the field of the political. In relation to the donor community, especially the World Bank and IMF, it should also be clear that these are in fact political actors with influence in most developing countries. It has been argued by others that most developing countries have had to satisfy two constituencies in their policy choices: The domestic majority and the external donors and creditors (Abrahamson, 2000: 117). Attention to the donors will therefore be given.
4
This principle was institutionalized in international law through a UN declaration from 1962 (Jones, 2008: 8). The notable exception to this principle is the USA (Valrian, 2010).
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Thirdly, the societal groups in the countries where the natural resources are extracted are important. Even in countries that have traditionally been thought to have a high degree of state-autonomy it has been shown by this research that societal groups have in fact played an important constraining factor on state elites (Donor et al., 2005; Hee-Yeon, 1998; Pempel, 1999), and as such it is deemed relevant to give more attention to non-state actors than the existing curse literature does. But which elites or groups should be included in an analysis of resource-rich societies? For one, the different classes can be seen as actors. Class analysis has sometimes been derided as unimportant in relation to developing countries because class mobilization is often low and other identity factors are often more important, for example ethnic identity (Weiner, 1987: 47). However, this is not necessarily so in countries with a large extractive industry since this type of industry has often created a highly mobilized and strong working class (Bates, 1971: 1; Bebbington et al., 2008: 901). Therefore, unions and workers could potentially be an important societal actor and will therefore be given attention in the analysis. Conversely, the interaction between the state and the local business sector has increasingly been recognized as an important factor in developing countries (Evans, 1995; Doner et al., 2005), and the business sector will therefore also be included in the analysis. Surrounding these actors is the wider domestic constituency. Through either electoral processes or demands for regime change or a change in policy they can produce pressure on the state. This will therefore also be given attention. A final societal group, which is overlooked by the literature on growth coalitions and state-society interaction will also be included, namely the NGO sector. Others have shown their increasing importance in relation to driving policy regarding the extractive industry (Bebbington et al., 2008) and they will therefore also be given attention. Lastly, the state will also be included. Little justification is needed for including this actor in a political analysis. However, the concept of the state needs some clarification. When referring to the state I am primarily aiming at the actors who have real influence over politics, e.g. on the distribution of resources. In some countries, this will involve a broad range of actors, but in most developing countries where the state is heavily centralized, the ruling elite often comprises a relatively small amount of politicians in the executive. These rely on a bureaucracy in order to implement their policies. Thus, when referring to the state I mean to imply both the political elite in the executive and the bureaucracy.
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2.5.1. Summing up: The theoretical approach The resource curse literature has over time developed several explanations of how the curse surfaces. Central to these explanations is the focus on unearned income and rents. Three explanations, all sharing this focus was presented. Furthermore, all three explanations share their belief in institutional quality as the solution to overcoming the curse. However, recent research has questioned both the approach taken in much of the statistical work being produced showing that institutions are important. Furthermore, theoretically the institutional explanation seems wanting in several regards. As a consequence, this thesis will take a non-statistical approach to answering the research question. Additionally, due to theoretical shortcomings of the institutional approach, attention will primarily be given to the political dynamic between actors of relevance, as this seems perhaps a more promising approach. Outlining the theoretical arguments for the effects of privatization and liberalization of the extractive industry showed that forceful arguments could be made that these would be relevant for the occurrence and political dynamics of the curse. However, this is an area that is so far not covered adequately by other studies, and the theoretical arguments did not provide any clear expectations. As such, the above has hopefully shown that there is a need to study further the effects that privatization and liberalization have on the resource curse. Having sketched the theoretical approach and argued for the relevance of the thesis, I will now turn to the task of examining how to best investigate the research question.
3. METHODOLOGY
A good research design is the logical sequence that connects the empirical data to a studys research questions and, ultimately, to its conclusions (Yin, 1994: 19). The goal of this section is to specify a research design that accomplishes this in the best possible way. Below I will argue that a comparative hypothesis-generating case study of Zambia is best suited for answering the research question.
3.1.
Why and how to use the case study approach?
Being able to follow the causal mechanisms of the resource curse is one of the key motivations for choosing a country study in this thesis. This follows from the proposition developed in the theoretical section, namely that the processes of politics and the actors involved in it are of 27
importance. In order to study these processes and actors, one will need to use a methodological framework that allows for great detail in the empirical investigation rather than using the broad strokes of more quantitative methodologies. The single case study would seem best suited for this (Basedau, 2005: 22). This also follows from the general observation that in-depth case studies are best suited for research questions that ask the how and why type of questions explored in this thesis (Yin, 1994: 20-21). But why not choose the comparative research design instead of the single case study approach? After all, the comparative study is often regarded as more rigorous than the single case study approach (Lijphart, 1971: 691). This is a valid objection that needs to be taken serious and it leads me to the question of how I will use the single case study approach. Thus, I propose to use the single case study approach in a comparative manner, comparing the same case over time. This combines the strength of the single case study, which is the possibility for great detail and attention to causal mechanisms, with the strength of the comparative method which, in its ideal form, is control for third variables (Sartori, 1991: 244). By comparing the same country over time, it will be possible to approach the ideal of the most similar system design (MSSD), which is to select cases that are alike on as many relevant variables as possible, except for the independent variable (Bgh & Bureau, 2007: 262; Sartori, 1991: 260; Lijphart, 1971: 688). This is often difficult in comparative case studies where the unit of analysis is a country, since it is difficult to find countries to compare where the control variable are equal (Bgh & Bureau 2007: 270-271; Lijphart, 1971: 689). However, by comparing the same country over time this ideal is often easier to achieve (Gerring, 2001: 222-223; Lijphart, 1971: 689) Let me now specify the set-up of the case study. The case will be divided into two periods in which there is a boom in the price of the natural resource which the country exports. The case will be chosen so that the resource extraction is nationalized in the first period, while being privately controlled in the second period, with liberal regulation (see figure 3.1.). This maximizes variance on the independent variable, privatization and liberalization. The outcome in terms of development will then be observed.
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Figure 3.1.: The methodological set-up of the case study Period 1: Nationally controlled resource extraction
National ownership / strict regulation
Boom in the price of natural resources
Developmental outcome
Period 2: Foreign private resource extraction

Private foreign ownership / liberal regulation
Boom in the price of natural resources
Developmental outcome
The case will be chosen so that the economic dimension of the resource curse is present in period one. By holding other relevant variables constant we can then observe how the occurrence and political dynamic of the resource curse might change as the ownership and regulation changes. The independent variable is therefore the ownership form and regulation, and the dependent variable is the economic resource curse. This leads the analysis to focus on two questions. Firstly, how does the occurrence of the resource curse change if at all as ownership and regulation is changed? Secondly, what are the effects of privatization and liberalization on the politic dynamics involved in the resource curse? The case study will be of the hypothesis generating kind. This approach is somewhat explorative in that it seeks to analyze the case in question in order to establish hypotheses that can then later be tested among a larger number of cases (Lijphart, 1971: 692). It should be clear then that the ambition of this study is not to try to falsify the resource curse hypothesis through the analysis of a single case. Rather, the ambition is more limited in that it seeks to reflect on the resource curse literature through grounded analysis and propose some new, tentative hypotheses. This is in line with the strengths and limitations of the case study approach. Thus, it has been noted that the
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strength of the case study approach is its ability to provide analytical generalization, that is inference to theory, rather than statistical generalization, that is inference from a sample to a larger population (Yin, 1994: 30), in this case from our single country case to all resource-rich developing countries. The case is therefore not chosen because it is especially representative of all resource-rich countries. Rather it is chosen strategically in order to be able to analyze the relevance of ownership and regulation for the occurrence and political dynamics of the resource curse. Below I will argue that strategically, the case of Zambia is optimal.
3.2.
is needed: -
Why Zambia?
In order to carry out the research design as described above a case with the following characteristics
There needs to be variance in terms of ownership and regulation, from complete national ownership to complete privatization and liberalization in order to fulfill the ideal of maximizing variance on the independent variable (King et al., 1994: 140).
The change in ownership needs to happen at a time so that there are at least two comparable boom periods, but with clearly different ownership and regulation forms, thereby ensuring comparability of the two periods (Lijphart, 1971: 686).
The dynamics of the resource curse needs to have been present during the period of national ownership. This is essential since we are inferring to the theory of the resource curse. Thus, the idea is to have a case where we know that the occurrence and political dynamics of the resource curse has been present and then analyze what happens to both of these when the ownership form is changed.
The conflict dimension of the resource curse needs to be controlled for as this is not the focus of the study. Because there is complex interaction between economic performance and the level of conflict (Collier, 2008: 27) it is deemed best to choose a country that does not have conflict in either period. This is in line with the general recommendation of controlling for relevant third variables (Lijphart, 1971: 686).
The institutional context needs to be comparable in the two periods, again as a necessary control for third variables. This is important seeing that the resource curse has increasingly been found to be dependent on the institutional context.
Giving these criteria I will argue that Zambia is an optimal case.
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First, there has been a complete change in ownership form from nationalized to privatized, which has also been followed by a liberalization of the regulation. Second, the privatization and liberalization process was initialized in the 1990s, long after the first boom period under national ownership in the 1960s and 1970s, and was finalized in 2000, just before the second boom period started in 2003. Third, Zambia is definitely a case where the economic resource curse was present under nationalized ownership. In fact, Zambia is a textbook example of the resource curse historically speaking, not only metaphorically, but also literally as it was devoted a whole chapter in one of the classic textbooks on the curse, which argued that Zambia exhibited all the characteristics of the economic resource curse (Auty, 1993: 220-240). Fourth, while Zambia is a classic case of the economic resource curse it has completely avoided the conflicts associated with the resource curse. Fifth, the institutional context has arguably not altered more between the two periods than what is acceptable for the purpose of this study. This last point might at first seem contentious for someone familiar with Zambian history as the country turned from an authoritarian one-party state to a multiparty democracy in 1991, which of course is a change in the institutional context. Let me therefore elaborate a bit on this final point below. While it is true that the regime type changed in Zambia it is still true that institutional quality remains weak. While there have been some improvements in indicators measuring governance in Zambia over time, the levels are still very low and far from the OECD-type institutions, which according to the resource curse literature are needed in order to avoid the curse. Therefore both periods are equal in the sense that institutional quality is very low. In terms of becoming a democracy it should be noted that there of course are some overlaps in what is meant by strong institutions and democracy, e.g. consolidated democracies are more likely to develop the rule of law and accountability enhancing institutions. But among weakly consolidated democracies, such as Zambia, there is no empirical support for the claim that they fare better in terms of avoiding the resource curse. In fact, there is some evidence that they are more prone to experience the resource curse than authoritarian regimes. Thus, one study finds that resource-rich democracies without strong checks and balances tend to perform worse than their authoritarian counterparts (Collier & Hoeffler 2007: 26). If anything then, Zambias overturn from authoritarian regime to weakly consolidated democracy with concentrated power in the executive and few checks and balances is likely to exacerbate the dynamics of the resource curse. This potential bias will be kept in mind during the analysis.
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While I will argue that these institutional changes do not constitute a problem in terms of holding the institutional environment constant, I will devote this issue additional attention in the analysis so that any objections to the argument made above might be met in an open matter. This is done in order to follow the general methodological guide of reporting uncertainty and testing rival hypotheses (King et al., 1994: 31-33). The above has been an attempt to specify the overall methodological approach of the study. With this framework explained, I now turn to the task of operationalizing my central variables and concepts.
3.3.
Operationalizations connecting theory with data
The research design operates with the following variables that are of central importance: National and private ownership Privatization and liberalization Resource curse Boom period
Each of these will be discussed below. 3.3.1. National and private ownership In specifying what constitutes national and private ownership we can draw on Luong and Weinthals typology of ownership forms in the extractive industry. According to this, state ownership can be defined as a situation in which the state holds 51% or more of the shares in the extractive companies and have full managerial control. Conversely, private ownership is used to describe a situation in which a private company, domestic or foreign, holds 51% or more of the shares and have full managerial control (Luong & Weinthal, 2006: 244-245). 3.3.2. Privatization and liberalization It follows from the above that privatization involves a transfer of more than 51% of the shares and managerial rights from the state to a private company. Concerning liberalization of the extractive sector, I take this to refer to reforms of the regulatory environment surrounding the mines which push regulation in a more corporate-friendly direction. This involves such issues as weakening environmental and social responsibilities of the company, and granting lower tax-rates and tax-exemptions. 32
3.3.3. The resource curse and development As stated in the theoretical chapter, I am interested in what can be termed the economic aspect of the resource curse, not the effects on conflict or regime-type. In the statistical literature, the economic resource curse has been operationalized as lower than expected growth in GDP. However, this is not a possibility in a single case study as we have no counterfactual to compare the growth rate of Zambia to, as this can only be accomplished through statistical tests. Additionally, it is only a relevant measure in the long run, as it can take many years for the curse effect to have a substantially negative effect on the growth rate. Therefore, instead of judging the occurrence of the resource curse on the growth rate, I will judge it on the causal link that comes before low growth, as specified in the curse literature, namely macroeconomic mismanagement and state expansion. This has the advantage that it is measurable, and it can be seen as a fair test of the occurrence of the curse, as the literature on the resource curse points out how quickly these negative effects happen, long before they can be registered in the growth rates (Auty 1993; Karl, 1997). Drawing on the theoretical chapter, the causal link in the curse literature during the boom period can be specified as (Karl 1997: 25-27): A sharp increase in public spending and investment Rising inflation Budget deficits Debt
All of these separate factors will be compared between the first and second boom in order to assess whether the economic resource curse is reappearing in Zambia after privatization and liberalization of the sector. 3.3.4. Specifying the boom periods It needs to be clarified what is meant by a boom period in order to structure the analysis. I take a boom to be a period of time in which the price of the natural resource is well above the average long-term price. Using this definition the two boom periods in Zambia can be specified by looking to figure 4.1 that shows the annual copper prices.
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Figure 3.2.: Average Annual Copper Prices, 1960-2008 (US$ per ton)
Source: International Copper Study Group, 2009: 64. The average price for a ton of copper was $3560 for the 20th century (Adam & Simpasa, 2009: 28). Looking at the price in constant 2000 $ (marked by the two circles) on figure 4.1. it is clear that there have been two periods in post-independence Zambia where prices have been well above this average for a sustained period, namely from the early 1960s until 1974, and again from 2003 and onwards. These constitute the two boom periods used in the analysis5.
3.4.
Summing up on the methodological approach
The methodological approach taken in this thesis will be a comparative, single-case study of Zambia. By dividing the case into two separate time periods the effects of privatization and liberalization of the extractive industry can be analyzed. Zambia is chosen as the case to be
Some have argued that the boom starting in 2003 ended with the financial crisis in 2008, which brought about a collapse in copper prices (Adam & Simpasa 2009: 28). However, as time has passed prices have rebound and have now surpassed an all-time high of 10.000 USD/ton (InfoMine, 2011), and hence the boom period used here includes 20092010.
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analyzed due to the countrys specific characteristics, which is optimal in terms of maximizing variance, ensuring comparability over time, and controlling for third variables. The case study approach will hopefully have the advantage of being sensitive to the causal mechanisms involved in the resource curse, and how they change after privatization and liberalization has been carried out. It is the aim to generate hypothesis from the case study for further empirical investigation. Having specified the theoretical and methodological approach of this thesis we can now turn to the task of analyzing the research question. This will be done in the next chapter, the analysis.
4. ANALYSIS: COPPER BOOMS IN ZAMBIA THEN AND NOW THE ROLE OF PRIVATIZATION AND LIBERALIZATION
Drawing on the methodological and theoretical sections, the following will present the analysis of Zambia. As will be remembered, the research question seeks to investigate both the occurrence and political dynamic of the curse after privatization and liberalization. The analysis will turn to the question of the occurrence of the curse in the first part, through an analysis of economic management in the two booms. In the second part of the analysis the political dynamic before and after privatization will then be analyzed.
4.1.
Comparing the economic management of the two booms
In the following, I will analyze the effects of the two boom periods, focusing on whether the resource curse phenomenon occurs under both nationalized and privatized and liberalized conditions. 4.1.1. Boom 1: Nationalization, state-led industrialization and economic decline At independence in Zambia in 1964 there was an expectation of modernity (Ferguson, 1999). This expectation was not unfounded. Zambia enjoyed a GDP per capita at independence that was three times higher than Kenyas, and even outperformed such countries as Turkey, Brazil, Malaysia and South Korea in terms of GDP per capita (ibid.: 6). Copper prices were very strong during the early independence years, and as all mineral rights were transferred to the state from its former owner, the British South African Company in 1964, it was hoped that this sector could contribute to the development of the country (Saasa, 1987: 26). The copper sector paid approximately 73% of its profits in taxes to the state, a tax rate that was
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relatively high by international standards (ibid.: 26-27). This tax system provided the state with approximately 50-60% of its total revenue in the first five years after independence (Obidegwu & Nziramasanga, 1981: 15). This massive revenue windfall formed the base for a new ambitious development strategy. As noted in the governments First National Development Plan: the capital investment available to Government is determined almost entirely by revenue obtained from copper (quoted in Shafer, 1994: 50) The development strategy chosen was import substitution industrialization (ISI) (Gulhati & Sekhar, 1981: 7). Further components of the strategy were nationalization of key sectors, including mining, and the introduction of price controls on key commodities (Kayizzi-Mugerwa, 1988: 19). Taken together, the strategy was highly state-driven. The goal of nationalization was first proclaimed by the government in 1968 in the so-called Mulungushi declaration, whereby 26 companies where nationalized (Saasa, 1987: 34). This did not yet include the big mining companies, but was part of the increase in state-participation in the economy, funded by mining revenue. In 1969 the so-called Matero declaration followed, extending the nationalizations to the mining sector, with the state acquiring a 51% shareholding in the mining companies (ibid.: 37). In 1973 the government, increasingly unsatisfied with the lack of re-investment of profits by the mining companies, decided to take full administrative control of the mining sector (ibid.: 41). The Mulungushi and Matero declarations completely altered the Zambian economy. As shown in table 4.1., parastatals became the bedrock of the Zambian economy. Table 4.1.: Parastatals share of the Zambian economy (in percent), 1968-1972 1968 Share in employment Share in gross output 14 10 1969 12 17 1970 17 27 1971 36 46 1972 37 45
Source: Gulhati & Sekhar, 1981: 25 Furthermore, as table 4.2. demonstrates, the source of capital investments shifted from private to public funds after independence.
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Table 4.2.: Total capital investment in Zambia, 1954-1970 1954-64 m Public sector Private sector Total Annual average Source: Saasa, 1987: 31 Even though mining revenue was flowing into the state coffers, the rapid expansion of state-led industrialization caused a permanent budget deficit equivalent to 5.2% of GDP in the period of 1970-74 (Auty, 1993: 222). Attempts were made to broaden the tax base, but proved to be too modest to cover the deficit even during the times of high copper prices (ibid.: 221-222). Thus, personal taxation was low throughout period 1, as would be expected from the resource curse literature. At the same time, the ISI strategy proved to be unsustainable. Initially, annual growth in manufacturing in the period 1964-1973 stood at an impressive 9.6% (Gulhati & Sekhar, 1981: 15). Estimates have shown that as much as 55% of the growth in manufacturing in 1965-72 can be attributed to ISI (ibid.: 17). However, the ISI strategy favored capital intensive projects in a country whose comparative advantage was relatively low wages and agriculture, and as a result the expansion in industry did not become internationally competitive (Kayizzi-Mugerwa, 1988: 21-22). Instead of diversification, the economy became increasingly reliant on the natural resource sector over time (ibid.). To compound this problem, the boom in the copper sector provided a strong upwards pressure on wages that spread to the whole of the economy (ibid.). From the mid-sixties to mid-seventies the wages in the manufacturing sector rose rapidly, and in the mid-seventies were twice the level of South Korea, and more than three times that of India (Gulhati & Sekhar, 1981: 31). In part to counter the wage pressure, extensive price controls were introduced on basic food items such as maize and beef. The prize of maize, the stable food of Zambia, was held constant in the period from 1964-74 despite a shortage in 1970-72. In real terms, the prices fell, and as a result imports of agriculture products soared, and domestic production fell (Obidegwu & Nziramasanga, 37 180.4 245.7 426.1 42.6 % 42.3 57.7 100.0 m 281.8 147.5 429.3 107.3 1966-70 % 65.7 34.3 100.0 -
1981: 141-142). Although not initially expensive, by 1980 the policy of price control took up 19% of total government expenditures (Kayizzi-Mugerwa, 1988: 19-20). Meanwhile, the mining sector slowly deteriorated as too little of the windfall was reinvested. The governments policy of extracting rents from the sector contributed to this problem (Meller & Simpasa, 2010: 45-46). Production costs rose as a result and Zambia lost market shares over time to other emerging copper producers. The rise in the cost of production can only to some degree be explained by worsening geological conditions and has instead been blamed on government interference in the sector (Adam & Simpasa, 2009: 13-14). The politicization of the mining sector also meant that the mining companys mandate was expanded to provide extensive welfare services to their employees (Adam & Simpasa, 2009: 1314), which became a drain on the mines and state (Kayizzi-Mugerwa, 1988: 10). In 1974 the price of copper plummeted and the economic problems rose exponentially. Almost overnight the sectors contribution to government revenue fell from 60 percent to none: The mineral sectors role as the main generator of government revenue had, for all practical purposes, ceased by 1975 (Kayizzi-Mugerwa, 1988: 30) The high levels of government investment that protected local industry, kept food prices low and provided welfare to urban groups proved difficult to scale back as revenue collapsed. Instead, debt increased at an alarming rate, rising to well over 100% of GNI in the 1980s. At the same time, the annual growth in manufacturing in the period of 1974-77 was -4.9% (Gulhati & Sekhar, 1981: 15). Growth in GDP collapsed, inflation rose and the economy entered a period of almost thirty years of decline, eventually transforming it from one of sub-Saharan Africas richest countries to one of its poorest. So exceptionally bad was the performance of the Zambias development that it is the only sub-Saharan African country to have experienced a decline in the UNs influential Human Development Index (HDI) from independence to present day (UNDP, 2010: 8). It is important to stress that the economic problems were not solely a result of the declining copper prices. Rather, it should be clear from the above that the seeds to the economic decline were sown during the boom period, an assessment shared by others (Meller & Simpasa, 2010: 47; Auty, 1993: 223; Shafer, 1994: 64-65).
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Overall, one could not imagine a better fit between the theory of the resource curse and the actual management of the boom in Zambia during this period. To see whether this is also the case during the boom occurring since 2003 I now turn my attention to period two. 4.1.2. Boom 2: Privatization, liberalization and macroeconomic stability While the current boom has been comparable in size to the one occurring in the 1960s-1970s the trajectory of the Zambian economy has been quite different: the governments handling of the boom [of 2003 and onwards] was exemplary... the government appeared to approach the issue with caution and avoided repeating the mistakes of the 1970s. (Meller & Simpasa, 2010: 84) The boom has not led to a massive state expansion this time around. In fact, governments share of real GDP has fallen during the boom. Additionally, there have been no new attempts at ISI nor have price controls been utilized. In terms of the core macroeconomic indicators, the Zambian economy has only seen improvements during the boom. Contrary to expectations, both debt and inflation has been brought down. The most recent IMF assessment of the economy thus paints a positive image of the macroeconomic performance: Economic performance continues to be strong ... Inflation is subdued; the current account deficit has narrowed; international reserves have remained solid; and the economic outlook is positive with continued strong growth. Zambias risk of debt distress remains low (IMF, 2010: 12) It has to be kept in mind that this assessment follows 8 years of extraordinary high copper prices and therefore cannot be explained by short-term improvements in the macroeconomic brought about by the windfall. The macroeconomic improvements seem to be permanent and there are no signs of erosion over time, quite the contrary. The mining sector itself is also performing better during the current boom. Whereas the sector in 1970s came to be marred by underinvestment, the mining sector has been expanding rapidly during the second boom with new investments being made and new mines opening (Strmer & Buchholz, 2009: 63). Thus, Zambia has seen its global market share in the copper sector rise substantially, albeit from a low level (Adam & Simpasa, 2009: 29).
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During the current boom government expenditure policy has been markedly more conservative than in the first period. There has been a de-coupling of copper prices and government expenditure: since 2004 has Zambian fiscal policy attitude changed to establish government expenditure independently of the behavior of copper prices. (Meller & Simpasa, 2010: 64) This can be attributed to the fact that the governments share in the enormous windfall in the mining sector has been minimal. Whereas the boom in 1960s-70s brought mining revenue up to as much as 60% of total government revenue, the current boom has not exceeded 4% of fiscal revenue. The modesty of the fiscal impact of the current boom is reflected in figure 4.2., showing the development in revenue from the mining sector over time. Figure 4.2.: Fiscal revenue from mining, 1980-2008
Source: Meller & Simpasa, 2010: 72 The government accrued approximately the same amount of revenue from the mining sector in the mid-nineties as in 2008. This despite the fact that the price of copper was hovering at around $3000 per ton in the mid-nineties, whereas it surpassed $9000 per ton in 2008. Equally, whereas the sector produced around 300,000 tons of copper per year in the 1990s, this had surpassed 600,000 in 2008 (Simutanyi, 2008: 4-5). To further understand the scarcity of tax revenue from the boom one can use 2005 as an example. In this year, the copper sector sold minerals at a value of $1.17 billion. The
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tax take from this enormous figure was a miniscule $11 million (Strmer, 2010: 7). Calculations of the so-called Implicit Tax Rate (ITR) show that Zambias tax take in the period of 2003-2008 was below 2%6 (ibid.). The explanation of the limited impact on revenue from the current boom should be found in the regulation surrounding the mining sector. Thus, Zambia underwent one of the most ambitious privatization efforts ever seen in the early 1990s. This not only meant a restructuring of the economy from state ownership to private ownership, but also brought about the elimination of trade barriers, subsidies, and the introduction of a floating exchange rate (Craig, 2000: 358). Between 1992 and 2000, 113 out of 140 state-owned enterprises were privatized (ibid.). The mines were no exception to this trend. In 1995 a new Mineral Act was passed by Parliament which led to the possibility of privatization. During 1997-2000 the mines were all sold to foreign investors (Lungu, 2008: 7). The Mineral Act of 1995 had laid out the overall fiscal conditions for mining sector, including a 3% royalty rate. However, the Act also specified that investors could negotiate the specific conditions with the government. And negotiate they did. Through so-called Development Agreements (DA) the investors and government arrived at an extremely low tax rate, with the royalty rate being set at 0.6% for most investors, and with generous tax incentives. It would seem then that the regulatory environment surrounding the mining sector, and the overall development strategy has changed so fundamentally during the first and second boom that the effects of the windfall has itself changed dramatically. Thus, the standard resource curse narrative does not seem as relevant in describing Zambias current boom period as it was in the first period. Macroeconomic indicators such as debt and inflation have seen improvements rather than deterioration during the current boom, as shown in table 4.3 below. And none of the three explanations for why the curse emerges, presented in the theoretical section, have been a feature during the second boom. Firstly, the neo-patrimonial spending patterns have not reemerged as the tax-take from the copper sector has been low. Secondly, the low tax revenue has also meant that the state has not repeated the costly state-led industrialization policies. Lastly, as the copper sector is not contributing much to state revenue, personal taxation has been increased markedly during the
The ITR is calculated as the ratio between sales revenue from minerals and the tax revenue collected from this sale, in the form of corporate income tax and royalties (Strmer, 2010: 1). To put Zambias ITR of under 2% into perspective, it can be noted that Australia has an ITR of approximately 9% on its extractive sector (ibid.).
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second boom (Weeks & McKinley, 2006: 15)7. On all accounts then, the current boom in Zambia does not conform to the theoretical expectations presented in the contemporary resource curse literature. Furthermore, it should be clear that these improvements are closely linked to the sharp reduction in state revenue from the copper sector, brought about by privatization and liberalization. Table 4.3.: Key macroeconomic indicators, Zambia 1965-2009 Period 1 Item (annual average for the period) / Years External debt stock (% of GNI) Government 8,3 share of Real GDP per Capita, current prices Inflation, GDP deflator (annual %) GDP growth (annual %) 4.0 3.9 -0.6 0.8 2.1 -0.8 1.6 4.5 5.9 14.7 3.1 8.8 12.4 60.1 114.7 25.6 22.8 13.2 15,1 22,3 26 17,6 21,9 17 12,6 12,3 N/A 49 89 112 273 226 211 171 38 1965-69 70-74 75-79 80-84 85-89 90-94 Period 2 95-99 00-04 05-09
In 1990, revenue from company taxation was approximately 6 percent of GDP, while personal taxation stood at approximately 1.5 percent of GDP. In contrast, in 2004 company taxation only provided 1 percent of GDP, with personal taxation providing 7 percent, making it the most important source of tax revenue for the government (Weeks & McKinley, 2006: 15).
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Government 61.4 revenue from copper exports (% of total government revenue)
39
2.68
2.65
1.6
4.5
4.8*
1.4
Sources: Saasa, 1987: 9; Kayizzi-Mugerwa, 1988: 29; Meller & Simpasa, 2010: 72; World Bank, 2010a * The average for this period is driven up the large revenue generated from privatization of the mines, providing 11-13 percent of government revenue in 2000 and 2001. In 2002, 2003 and 2004 mining revenue was all less than 0.5 percent per year. 4.1.3. The sustainability of the current model Above it was shown that none of the negative effects from the first boom seem to be repeated under the new ownership and regulatory environment. This raises the question of whether the current model is more sustainable in terms of development. Here I take sustainable development to mean: development that meets the needs of the present without compromising the ability of future generations to meet their own needs (Ruud, 2006: 137) Two questions arise from this definition. Firstly, does the current development ensure to a sufficient degree that the needs of the Zambian population are met? Secondly, does the development model ensure that the long-term development of Zambia is ensured? I will argue that on both counts the neoliberal development model in Zambia during the second boom fails. Firstly, in terms of impacting the fulfillment of basic needs of the population the model is flawed. The copper sector, as with most extractive industries, is an enclave economy with few linkages to the rest of the economy. Statistical tests confirm this as they have shown that Foreign Direct Investments (FDI) in the extractive sector have no positive spill-over effects for the rest of the economy (Alfaro, 2003: 9-11). This is a consequence of the high capital intensity and technological sophistication of mining. Investments in the sector is primarily spent on capital rather than employment of local labor, and due to the technological sophistication of the capital needed, there
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are few local Zambian firms that function as providers of inputs for the sector (Saasa, 1987: 10-11; Adam & Simpasa, 2009: 4). Although the sector is the second largest provider of formal employment in Zambia, only surpassed by the state, the total number of employees stood at approximately 32,000 in 2006 (Simutanyi, 2008: 7). This is not an insignificant amount, but as the World Bank notes in a study on Zambia, it is not sufficiently high to have a high impact on poverty levels (World Bank, 2008: 25). In order for the sector to contribute to the welfare of the population a strong argument can therefore be made for the centrality of taxation (Adam & Simpasa, 2009: 4). However, by reducing the taxation dramatically through the privatization and liberalization process this key feature of the sector has been diminished, thereby making it even more of an enclave (Breisinger & Thurlow, 2008: 8). While the mines have experienced extraordinary profits during the upswing in copper prices, Zambian society has thus not gained much. The re-investment of profits from the copper could potentially have been a great development push, but instead the profits were expatriated to the multinational corporations that controlled the sector: Undoubtedly, this resource windfall [from the boom until 2008] was the biggest opportunity for Zambias transformative development. However, given the ownership structure of the mines, a substantial share of the windfall income accrued to the foreign private owners of the Zambian mines. Given the tilted tax regime, a substantial proportion of the measured foreign asset accumulation was in fact repatriated as profits and payment of dividends by Zambian-based mining houses to their foreign shareholders. This amount was estimated to be about 75 % of total net capital outflows. (Meller & Simpasa, 2010: 71) Had Zambia taxed their extractive sector at the same rate as Australia, the country would have earned an additional $1.4 billion in tax revenue in the period of 2003-2008. This is equivalent to 21% of official development assistance to Zambia during the period (Strmer, 2010: 9). To put this in relation to the fulfillment of the basic needs of Zambians, one can compare this figure to the costs of meeting the Millennium Development Goals (MDGs) in Zambia. It has been estimated that there is a financing gap in Zambia of approximately $6.2 billion for the period 2008-2015 if the MDGs are to be meet (Strmer & Buchholz, 2009: 68). This means that 23% of the funds missing to
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finance the MDGs could have come from the mining boom during 2003-2008. Additionally, assuming that high copper prices continue until 2015 and the production was taxed more aggressively than is now practice, the copper sector is estimated to be able to fill the financing gap and more (ibid.: 69). Taken together, it would seem that although Zambia has achieved growth, it has not achieved sustainable development in the first sense of the word, namely that of meeting the populations needs. However, there is of course an obvious objection to this: Would a higher tax rate not lead to the negative outcomes described in the resource curse literature and found in Zambia during the first boom? Of course this risk exists. There is no guarantee that collecting more taxes from the mining sector would have provided better development results. But I will argue that while this is a danger, the alternative of preserving the status quo is not a sustainable option. To expand on the latter argument I now turn to the second aspect of sustainable development, namely that of ensuring the welfare of future generations. In terms of not compromising the potential to meet future generations needs, the situation is also problematic. Here, there are three issues worth commenting on: Externalities, subsidies, and mineral depletion. The extractive sector is known to produce high costs in terms of negative externalities. These are most prominently in the form of pollution and wear and tear on infrastructure. An indication of the costs being passed on from the mines can be seen from the Copperbelt Environmental Project (CEP) which seeks to clean up hazardous waste in copper mining areas. The project among other things focuses on removing poisonous lead from Kabwe town, where 5,000 people have been infected with lead poisoning due to its proximity to the mines. The cost of the project is so far 50 million USD (Reuters 2007). These costs are covered by the Zambian public and donors, rather than the mines that are responsible for producing the costs. That environmental degradation is a problem in Zambia is clear from the Environmental Performance Index produced by researchers at Columbia University. Zambia ranks as one of the most polluted countries, at number 130 out of 149 on the index, with almost all of the low-scoring countries being heavily dependent on the extractive industry (EPI 2010). In economic theory, taxation is one way to off-set the cost to society through pollution and other negative externalities. However, so far it seems the state is covering the expenses without much compensation.
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In terms of subsidies it should be pointed out that in addition to the generous tax breaks that the mines have negotiated, they are also granted more indirect support. For example in the form of state and donor funded infrastructure. This also includes electricity for which the mines consume more than 50% of the national supply. Production of electricity is one of the few things in Zambia that is still the responsibility of the state. The mines only pay approximately 25% of the cost that other consumers pay for their consumption of electricity as part of an indirect state subsidy for the sector (Mpande, 2009; Strmer & Buchholz, 2009: 63-64). Countering in subsidies and tax incentives, one author finds that the mining sectors contribution to the state coffers is negative (Mpande, 2009). Lastly, it is important to stress that minerals are a non-renewable resource. Mining is different in this respect than say textile production. Because mineral reserves will eventually run out it is clear that the key is to make sure that the wealth that accrues from mining is used to secure long-term sustainability. As a result, the use of GDP growth as the appropriate measure of economic success in countries that are highly dependent on extractive industries has been criticized (Ley, 2010). Ley argues that one needs to measure progress on the so-called adjusted savings rate. The way in which the adjusted savings rate is calculated, and the results of this exercise are reflected in table 4.4. Table 4.4.: Adjusted net savings for Zambia, 2001-2007 (all figures are percentage of GNI)
Source: Ley, 2010: 11 As can be seen from the estimates, Zambia has been suffering from negative adjusted savings for most of the current boom period. This reflects that national wealth is not being upheld over time. In essence, costs are being transferred to future generations. Taken together, the development model that has been in place during the current boom seems unsustainable. The country is not realizing the potential to meet its populations needs, neither now nor in the future. Rather, it would seem that Zambia is being drained of wealth without
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compensation in order to sustain development. In the worst case, the mining boom of the 2000s will have cost the Zambian state more than it has brought the country. 4.1.4. Summing up: The economic analysis This first part of the analysis has focused on the occurrence of the resource curse during the two booms in Zambia. It has shown that while the curse did occur under national ownership and strict regulation, it did not reemerge after privatization and liberalization, as macroeconomic stability and no state expansion could be observed. While the curse has not re-emerged, it was argued that current boom is not sustainable in terms of development. The second boom has been characterized by foreign Multinational Corporations (MNCs) siphoning wealth out of the country with little or even negative impact on current and future generations. Having reached this first tentative conclusion, I now turn to the second part of the analysis which seeks to compare the political dynamics during the two booms.
4.2.
Political analysis: The dynamics of the curse under national and private ownership
The above analysis highlighted that the two booms occurring in modern Zambian history have been managed very differently by the state. The first was handled exactly as the literature on the resource curse would predict, creating a massive unsustainable state expansion and macroeconomic imbalances. The second boom, however, presents the resource curse literature with a host of puzzles. Firstly, the curse literature assumes that politicians will want to capture and redistribute rents from the extractive sector in order to stay in power, as well as the population demanding such redistributive policies. How does one then explain that politicians in Zambia have seemingly accepted a minimal tax-take from the copper sector during the current boom? Secondly, if a boom of the magnitude seen in the 2000s is theoretically expected to be a perfect storm for politicians creating macroeconomic imbalances, then why has macroeconomic policy improved during the present boom? In essence, how could two comparable booms in the same country, under condition of weak governance produce such different results? 47
These questions lie at the heart of the following analysis. In line with the theoretical section, the approach to answering these questions will focus on the political dynamics between crucial actors, and the coalitions they form. In line with the methodological section, the approach taken will be comparative. Thus, in order to understand the puzzle of todays boom it is argued that we need to understand the politics of the previous boom. Let me therefore begin by analyzing the political dynamic during the first boom, which will then be compared with the dynamic during the current boom in the last part of the analysis.
4.3.
The political dynamic during the first boom
We were born, unfortunately, with a copper spoon in our mouths First President of independent Zambia, Kenneth Kaunda (quoted in Simutanyi, 2008: 4)
As Zambia was granted independence in 1964, one party came to dominate politics, namely the United National Independence Party (UNIP). The task UNIP faced at independence was a daunting one: To build a nation-state and promote development. As was apparent from the analysis of the economic management of the first boom, nationalization of the mines played a key role in the new governments strategy to obtain these goals. As we know from the previous sections, things went terribly wrong for Zambia in this period. In the following I will explore why things went so wrong, going beyond the usual focus on institutions as the prime cause. Instead I will focus on the effects that nationalization had on the coalitions that emerged during the boom among the political actors in Zambia. 4.3.1. Nationalization and its effects on development coalitions Colonialism left Zambia with a highly centralized state. Before leaving, the British did try to set up a system of parliamentary rule, but UNIP changed the constitution upon taking over power in 1964 and instituted a presidential system (Phiri, 2006: 231). The form of leadership was highly centralized with almost all the power vested in the executive, a system of governance that continues in Zambia to this day. The concentration of power in the state was partly a consequence of the highly nationalist ideology that dominated Zambia at independence.
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Nationalism was an expectable reaction to the subordination of Zambians during colonial rule8. However, UNIP was also quick to exploit the nationalist agenda to secure their own continued rule. Thus, UNIP increasingly equated the state with the UNIP, and demanded unconditional loyalty, as evident in President Kaundas rhetoric: We must forget our individualism and put the Nation first before us. The party is supreme. (quoted in Macola, 2008: 23) However, almost immediately after independence it became clear that UNIP was not supreme. Regional and tribal cleavages were stronger than the nationalist ideology and dissatisfaction and oppositional voices to UNIP became a feature of the early post-independence years (Phiri, 2006: 134). UNIP was under immense pressure to fulfill the populations expectations of modernity (Ferguson, 1999), for which the UNIP had helped inflate beyond what was achievable9. The solution that UNIP chose in order to manage opposition and hold together the fragmenting country was a combination of suppression, neo-patrimonialism, and state-led industrialization. As documented in the economic analysis, all of this was made possible only with the use of revenue from the copper sector. In order to secure that the state-led industrialization could succeed, an efficient bureaucracy was needed to implement the policies. However, during the first boom the bureaucracy was not in a state to manage the technically demanding task involved in directing the economy. Firstly, the bureaucracy was extremely weak at independence. During colonial times, Africans held a marginal number of the middle and higherlevel positions in the bureaucracy. Out of the 1,298 senior appointments in the bureaucracy only 39 were held by Africans (Shafer, 1994: 66). When the British left, the bureaucracy was deprived many of its skilled staff. The low level of training and experience in the bureaucracy persisted for years (Shafer, 1994: 66). Second, the bureaucracy quickly became politicized. Due to the overriding need to build a strong support base for the new government, UNIP increasingly came to see the civil
See Phiri, 2006 for an analysis of how populist nationalism came to dominate over multi-cultural liberalism in Zambia.
9
For example, Kaunda had at a political rally in January 1964 promised that there should be eggs and milk for every child and for every family in Zambia by 1970 (quoted in Phiri, 2006: 135).
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service as an extended arm of the party. President Kaunda openly acknowledged this in a public speech given after the 1968 election when the opposition challenged UNIP: I cannot see how I can continue to pay a police officer or a civil servant who works for Nkumbula [the opposition leader] How dare they bite the hand that feeds them? They must learn that it pays to belong to UNIP. Those who want to form a civil service of the opposition must cross the floor and get their pay from Harry Nkumbula. (quoted in Phiri, 2006: 141) As part of the politicization of the bureaucracy, hiring also became part of a network of patronage. Between 1964 and 1969 the number of public employed rose from 22,500 to 51,000, making the state one of the most important employers in the country (Rakner, 2003: 45). The politization and low level of skilled staff in the bureaucracy meant that it could not be relied on as an effective vehicle to guide the economy. Thus, during the first boom the state was at one and the same time both strong and weak. It was strong in the sense that power was concentrated in the executive, and due to the seemingly endless supply of revenue from mining it became the central actor in politics and the economy. However, it was weak in the sense that the states ability to implement policies was compromised by a weak and inefficient bureaucracy. The states dominance was partly made possible by the fact that the local business sector was almost non-existent at independence. This also meant that the potentially beneficial governmentbusiness relationships never were realized in the first period. Apart from the mining sector, the two largest earners of foreign exchanges were the maize and tobacco sector. The tobacco sector was highly ineffective and only managed to uphold exports due to subsidies. The maize production was highly volatile with Zambia being a net-importer of maize in some years due to drought (Obidegwu , 1981: 14). The relationship to the sparse local business community that did exist at independence was furthermore complicated by the dominance of non-Africans within this community. The Mulungushi reforms that was the first step towards nationalization of the economy was not only part of the ISI developmental ideas, it was also an attempt to eradicate past racial inequalities (Macmillan, 2006: 190). As the nationalization of the economy was carried out, the relationship between the state and the local business sector became filled with tension and nervousness in the business community
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(ibid.: 198). The reforms targeted business, in some instances even eliminating some sectors of business in order to make it easier for a black entrepreneurial class to emerge (ibid.). The reforms also minimized the business sectors possibilities for influencing state policies (Rakner, 2003: 47). Following the recession after 1975 and the massive decline in manufacturing that followed, the goal of establishing a black entrepreneurial class was a dream that was not to be fulfilled. State-business relations thus never came to be a determining factor in the first boom period. The local business sector was not the only actor without any political influence in these early years. The donors were also sidelined by the states easy access to mining revenue, and later to loans. It was not until the 1980s that donors, especially the IMF, came to be an influential actor (Rakner, 2003: 54). Therefore, the first boom period was not shaped by the interests of donors, which facilitated the nationalistic agenda of the UNIP. While the local business sector and donors were unimportant allies for the government there were other actors on the political scene that could not be ignored by the government. Perhaps most importantly was the urban areas were the trade unions, especially within mining, were strong. This study shares the following assessment of the strength of the unions during the crucial years under the first boom: ZCTU[the Zambian Congress of Trade Unions] was the most powerful non-state association in Zambia throughout the First and Second Republics [1964-1991] (Rakner, 2003: 51) For the new UNIP government the mining unions were seen as an obstacle to achieve their vision of a modern diversified economy, and there is little doubt that control over the mining unions was essential in these early independence years (Bates, 1971: 1). Unlike the opposition, UNIP could not suppress the unions. Instead, the state sought to co-opt the unions throughout the period, which proved unsuccessful (Larmer, 2005: 321). In 1965, immediately after independence, the government sought to bring the unions under their control by setting up the Zambian Congress of Trade Unions (ZCTU) as an umbrella organization for all unions in Zambia. Additionally, the members ability to take legal industrial action was severely restricted (Larmer, 2006a: 157). UNIP sought to capture ZCTU by bringing forth hand-picked candidates for internal elections in ZCTU. In defiance, the union members strongly rejected the UNIP candidates (ibid.). In realization of the importance of controlling the union members of the
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mining sector the state furthermore set up the Mineworkers Union of Zambia (MUZ) in 1967 (ibid.: 158). Here, the government had more luck in hand-picking the leadership of the union, but never secured the support of the rank-and-file members (ibid.). In 1971 the government introduced a new Industrial Relations Act (IRA) that de-facto made it illegal to strike, and furthered the power of ZCTU over its member unions (ibid.: 159). These legislative attempts at weakening the unions did not succeed. In fact, it has been suggested that the movements political influence was strengthened by the governments policy of putting all unions under the control of ZCTU (Rakner, 2003: 50-51). The influence of the unions was visible throughout the period. Already in 1966, two years after independence, the mining unions staged strikes to claim better conditions and wages (Rakner, 2003: 50). As noted in the economic overview of the first boom period, the demands for better wages were met to some degree which sparked an upwards wage pressure for the rest of the economy. It is against this light that the introduction of food subsidies should be seen, as these were deployed as a tool to contain further upwards pressures. Furthermore, the strength of the unions should also be viewed as part of the rationale for nationalizing the mines. Having failed in controlling the miners through the unions the government saw the nationalization as a means of gaining more control over industrial relations in the copper sector (Larmer, 2006b: 300). The miners themselves were against nationalization for this very reason (Larmer, 2006a: 158-159). Once nationalized, the government sought to appease the unions by putting in place a separate welfare system for the communities surrounding the mines (Fraser & Lungu, 2007: 7). The unions themselves played an active role in demanding these policies (ibid.). It would seem that the government had opted for nationalization in order to control the mining unions, and the unions in return demanded special treatment in order to accept this model. This coalition between the unions and the state, with the latter given the former special treatment has led some to term the Zambian miners a labour aristrocracy (Kayizzi-Mugerwa, 1988: 14). This label is, however, a bit misleading since the unions never functioned as a support base for UNIP (Larmer, 2005). Instead they were perhaps the strongest opponent of UNIPs policies and were instrumental in bringing an end to the one-party state (Akwetey & Kraus, 2007; Larmer, 2006a & 2006b). However, it is true in the sense that the state was preoccupied throughout the period with keeping the rural areas and the unions content.
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The UNIP government, however, never succeeded in gaining the confidence of the miners. This led the government to fear the unions. When vice-president in the UNIP government, Simon Kapwepwe decided to leave the government and form his own political party in 1971, UNIP was concerned. When his new party won in a significant mining constituency in the 1972 by-elections, UNIP was horrified. Fearing electoral defeat in open elections due to the loss of the mining constituency, UNIP declared the new political model of one-party participatory democracy, a thinly veiled euphemism for authoritarian rule where opposition parties were banned (Phiri, 2006: 159pp.). The conflicts between UNIP and the mining constituencies were a strong determinant in Zambian politics throughout the first boom and created a strong pressure on the government to make sure that the mining sector was strong and provided benefits to the workers. It was partly this pressure that explains the neo-patrimonial distribution of rents from the mining sector and the following economic mismanagement. It was also this dynamic that ensured that mining interests were strong throughout the first boom period, making diversification less likely. Another equally powerful actor in the period that ensured the dominance of mining interests was the mining MNCs. The mining MNCs had enjoyed a protected status during the colonial administration. Enfranchisement was stalled due to the fear that the mining companies would flee the country (Phiri, 2006: 21). As independence was approaching in the late 1950s the mining MNCs put their investments on hold, fearing that nationalization was imminent (Obidegwu & Nziramasanga, 1981: 9). This problem intensified after independence. In 1961 before independence - 50 percent of the earnings in the sector were paid out as dividends to share-holders, while the rest was re-invested. In contrast, during the period after independence an average of 94 percent of the earnings were paid out to the share-holders, reflecting investors fears of a government take-over of the mines (Obidegwu & Nziramasanga, 1981: 4). The conflict between the mines and the government put in place a self-reinforcing political dynamic that eventually led to nationalization due to the governments dissatisfaction with lack of investments. Nationalization ended the mines managerial control, and politicization soon followed as the demands from the miners union became more difficult to manage. The nationalized mines also became infested with corrupt ties to the government (Simutanyi, 2008: 2). The overall effect was the decline of investments and subsequent rise in production costs in the copper sector, as described in the economic analysis.
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However, the mining MNCs were not powerless against the Zambian state, and used their considerable influence to ensure that their interests were seen to. For example, in 1970 the mining MNCs managed to secure a deal with the government which meant that any loans they made abroad was to be backed by the government (Obidegwu & Nziramasanga, 1981: 18). In 1978 the mining MNCs share of the foreign debt was 19 percent (Saasa, 1987: 57). Furthermore, while the tax take from the mines was initially were high, as documented in the economic analysis, the mines were successful in negotiating lower tax rates throughout the period (ibid.: 34-36). The consequence was once again that mining interests were catered to, at the expense of development. The mines had used their power to ensure that Zambia would continue to be a mining nation first and foremost. 4.3.2. Summing up: The political dynamic of the first boom period The analysis of the first boom conforms well to the resource curse literature in several regards. All three explanations put forward in the contemporary resource curse were factors during the first boom. Neo-patrimonial redistributive policies were a key characteristic of the period. The mines were taxed rather than the population. And state-led industrialization was promoted. All contributed to the downfall of the Zambian economy. In terms of the politics behind these dysfunctions it is worth noting that a defining characteristic of the first boom period was the dominance of mining interests, both the mining unions and the mining MNCs. This was facilitated by the weakness of all other political actors in Zambia during the first boom, including the local business sector, opposition, and donors. Taken together, there was therefore a strong coalition during the first boom period that all had interests in promoting mining interests, despite the governments initial preoccupation with diversification. The governments strategy of building a new business community from scratch therefore proved difficult as they faced this task without allies and under attack (Shafer, 1994: 63). Increasingly, the strategy changed to suppression of opposition and local business sector while relying on support through spending. It should be clear that this political mode of governing was founded on the large revenues from mining and the nationalization of the mines. It was these characteristics that created the foundation for the economic problems that unfolded during the first boom. Having analyzed the political dynamics during the first boom I now turn to the second boom period.
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4.4.
1991-2010: The privatization and liberalization agenda and its consequences
We must ensure that we do not kill the goose that lays the golden egg. There is little point in taking in a few million dollars in tax [from the mines] if thousands of jobs are lost as a result Rupiah Banda, President of Zambia since 2008 (quoted in Reuters, 2009)
As noted previously, the puzzle of the second period is why the state has come to back a situation in which the state receives a minimal tax-take from the extractive sector and has little political power over the mines due to privatization. This support is reflected in the opening quote by President Banda. To shed light on this puzzle I now turn to the analysis of the political dynamic after privatization and liberalization. The first part of the analysis will focus on the restructuring of the Zambian economy in the early 1990s and the effects it had on coalitions among the different actors. In the second part, attention is turned to the puzzle of why the mines were privatized and liberalized. In the last part, the political dynamics during the current boom will be analyzed. 4.4.1. Part 1: Privatization and liberalization in the early 1990s - The state-donor coalition Our economy is in ruins and even the ruins are in danger President Frederick Chilupa at the Opening Speech to the National Assembly, 1991 (quoted in Rakner, 2003: 68) As the quote above reflects, the new Movement for Multiparty Democracy (MMD) government inherited an economy that was on the brink of implosion. The need for radical restructuring was evident. Although the MMD had its origin in the union movement and came to power largely on the back of this movement, it campaigned on a neo-liberal platform, promising liberalization and privatization of state-owned industry (Lungu, 2008: 6). While MMD had used its roots in the powerful unions, the local business community also played a key role in the early years of the MMD movement, primarily as a source of finance for the MMD (Larmer, 2006b: 296; Rakner, 2003:65). Rakner notes that the overwhelming electoral victory of MMD is perhaps better ascribed to the publics rejection
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of UNIPs model of economic management than an accept of the neo-liberal platform (2003: 65). As such, the coalitions that MMD built its power on consisted of actors with varied interests. The business sectors support for MMDs ambitious liberalization and privatization plans could initially be seen as a break from period 1, where the business community was suppressed. The business community saw the MMD as chance to gain more influence and the MMD at first granted this. Government officials hosted a number of seminars were the largest business associations where invited. The business associations also gained a representation on several government boards and committees (Rakner, 2003: 94). These attempts at representation did not, however, lead to any meaningful influence (ibid.). The breaking point in the relationship between the state and business community came shortly after MMD took power. Partly because of lack of real influence, and partly as the harsh effects of the rapid liberalization was felt by the business community. In 1993 the two largest non-agricultural business associations initiated a high-profile public campaign against the governments open trade regime, arguing that the reforms kills domestic industries (Abrahamson, 2000: 64; Brutigam et al., 2002: 531). The frequent meetings between government and business waned out, and the government increasingly sought to distance itself from the community (Rakner, 2003: 94). The positive relationship between state and business turned into a relationship of mutual distrust (Brutigam et al., 2002: 531). The business community was unimportant as a base of political support and their interests were therefore not prioritized by the government (ibid.: 532). As a consequence of the break the government had to turn to other parts of society for support. As the unions were important in their electoral victory it would be natural to assume that they would base their power on this group. The unions initially supported the MMD as they had come to realize the need for a radical break with the economic model of the UNIP era (Rakner, 2003: 82). The support was also politically motivated as they saw the privatization of state-owned enterprise as a means of breaking up UNIPs old power bases (Fraser & Lungu, 2007: 9). In essence, the MMD government was granted a honey-moon period, in which the unions accepted controversial policies such as the elimination of all maize subsidies, despite having been opposed to this during the 1980s (Rakner, 2003: 68). Furthermore, the new President Chilupa was a former leader of ZCTU and had during the campaign promised miners that their jobs would be safe under a MMD government (Larmer, 2006b: 309).
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With a former union leader as president there was an expectation that the new government would be more receptive and inclusive towards the unions (ibid.: 308). It did not take long, however, before the relationship between the government and the unions soured. This was in part due to the dissatisfaction with the government among the union leaders, whose members were negatively affected by the economic shock therapy. But in part it was also an outcome of an active MMD policy that sought to eliminate the influence of the unions on government. As was also the case with business interests above, the MMD government increasingly followed a policy of excluding societal groups from the policy-making process. This strategy was most obvious in relation to the unions (Rakner, 2003: 82). According to industrial relations regulation the government was obliged to call for quarterly tripartite meeting. By 1994 only four such meetings had been held (Rakner, 2003: 95). As early as 1993, ZCTU leadership denounced the MMD government (Rakner, 2003: 95). Whereas local business interests were excluded in both period 1 and 2, the states relationship with the unions presents a clear break with the past. In period 1 the unions had a strong hold on government. In contrast, period 2 saw a clear break between government and the unions. How could the government afford to turn away from the unions when they had been such an important actor in period 1? One explanation was the neo-liberal economic reforms themselves. The reforms decimated union membership as the open trade regime and public cuts meant that between 30,00050,000 jobs were lost in the period of 1992-1996 (Rakner, 2003: 96). All through the 1990s the unions lost much of their financial and membership base (Larmer, 2006b: 311). The government sought to exploit this weakness and severed themselves from the historically strong unions. The combination of a strong government mandate for change, and the weakened union and business sector meant that the state in the 1990s opted for an extremely centralized coalition in governing the country. The economic reforms did not provide any winners and as a result, no sector emerged that could be characterised as a new constituency in favour of the economic reform policies (Rakner, 2003: 17).
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However, as we would expect from the theoretical section, no government can govern without a coalition that is willing to support it in its quest to carry out changes. The MMD built such a coalition by insulating the bureaucracy from the reform process, and by entering into a close coalition with the donor community, as shown below. While the government used the economic reform momentum to challenge the power of the previously strong unions, the case was different in relations to the strong but inefficient bureaucracy inherited from the UNIP era. The donor community did try to push through reform of the bureaucracy and the government did include promises of modernizing and downsizing of the bureaucracy, but little was done in this regard. The government adopted a World Bank program intended to downsize and streamline the bureaucracy, which included a goal of laying-off 25 percent of public employees within 3 years (Rakner, 2003: 71). Instead the civil service grew by 19 percent between 1989 and 1994 (ibid.). The government had made plenty of foes with the economic reforms and was clearly not ready to alienate public employees and therefore decided against reforming the bureaucracy which meant that inefficiencies continued. The donor community had the advantage that unlike the unions and business sector they could provide the one thing that government was most in need of, namely hard cash. According to the resource curse literature, governments in resource rich countries will look to the extractive sector to secure funds. But the copper sector was in a dismal state in the 1990s. Wages for the mining workers were being funded by government loans, while the mines were making a loss of approximately USD 1 million per day (Lungu, 2008: 8). The mining sector had lost its function as a cash cow and had instead become a burden on the state coffers. Therefore, the overriding objective of the government was to secure funds in order to stay in power. Of all actors involved in Zambian politics only the donor community could provide this. Hence, a coalition was formed with donors. This explains to a large degree the fact that the economic reforms carried out in the 1990s essentially were the same that the IMF had pressed for during the 1980s. As has been pointed out, it was a policy-making process of aid for reform (Rakner, 2003: 134). The donor-state coalition meant that popular objections to reforms were put aside:
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the MMD was forced to choose between maintaining its popular support base and meeting donor conditions. It has consistently chosen the donors (Larmer & Fraser, 2007: 616) This created a situation of so-called disciplined democracy, whereby economic decisions were external to the political system (Abrahamson, 2000). The consequence was that the chances of a domestically based coalition were lost. The donors anticipated that economic liberalization would be followed by political liberalization (Abrahamson, 2000: 63-64). However, the narrow coalition necessary to continue the unpopular economic shock therapy meant that the MMD government could not garner much popular support. In essence, the reforms produced few winners but many losers. As the 1996 elections approached the MMD government increasingly sought to suppress political opposition due to fears of losing power. The election was marred by severe irregularities and the opposition decided to boycott the elections. As a result, the MMD secured 73 percent of the votes in a sham of an election (Rakner, 2003: 108-111). 4.4.2. Part 2: Privatization and liberalization of the mines: Donor dominance While the state-donor coalition was relatively stable during the 1990s, the coalition came to a deadlock on the question of privatization and liberalization of the mines. In 1992 the idea of privatizing the mining sector was floated by a minister in the MMD government. A public outcry followed immediately, not least from the unions (Rakner, 2003: 95). Since then, the issue of privatization of the mines was not pursued by the government. The donors, however, insisted on the need to privatize the mines and when the issue of debt relief came on the agenda in 1996 they were quick to link the two together through conditionality (Lungu, 2008: 6). The crushing debt was perhaps the most important constraint on the Zambian economy. Faced with the hard choice of going against the wish of powerful domestic actors in Zambia, and the wish of the donors, the MMD government once again chose to please the donors (ibid.: 7). Throughout the period of 1997-2000 the mines were divided and sold to foreign investors. This furthered the break with the unions. Thus, as the mines were privatized the welfare function of the mines created in the UNIP years seized to exists, creating widespread dissatisfaction (Fraser & Lungu, 2007).
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The forced privatization and liberalization of the mines showed the increasingly skewed relationship between the government and the donors, which explains the puzzle of why privatization was pursued at all. While the two had found common ground on a platform of reforming the economy along neo-liberal lines in the early 1990s, the inclusion of the mines in this reform agenda broke the common ground between the two. This did not create a break between the government and the donors. However, it did create a precarious political situation when the boom in copper prices hit Zambia, the focus of the next sections. 4.4.3. Part 3: The boom of the 2000s: Understanding the unsustainable development model The forced privatization process of the late 1990s put the government in an unfavorable negotiation position. Copper prices were historically low, support for the government was at a low-point, and the pressure from the donor community meant that the government was in a hurry to sell. Consequently, the so-called Development Agreements (DAs) outlining the conditions of investment were extremely favorable to the mines (Ratty, 2008 : 18). The DAs liberalized the regulation of the mines, removing the social functions of the mines, as well as lowering environmental standards, and, as has already been described, the tax burden was minimized (Lungu & Fraser, 2007). For the donors, the need to privatize and liberalize the mines was not only necessary in terms of economic efficiency, it was also necessary in order to demonstrate Zambias new development model. As one World Bank report on Zambia stated, the privatization and liberalization was necessary for providing a clear signal to investors of the Government of Zambias commitment to private enterprise (quoted in Ratty, 2008: 15). The government on the other hand seemed mostly concerned with reviving the mining sector in order to secure jobs to the miners in order to avoid political discontent from this once powerful group. Securing taxation from a sector that was seen to be in a free-fall was not pursued. Investments in the sector did not materialize until after 2003 when the price of copper started soaring, suggesting that the DAs had little effect on the investment decision compared to the price of copper (SARW, 2009: 23; Fraser & Lungu, 2007: 20). However, from 2003 and onwards investment soared and can be accredited with saving the mining industry in Zambia. While the mining sector was saved and resumed its former position as the most profitable and productive sector in the country, the boom left the state with little additional tax revenue. Table 4.5. shows the governments sources of income during the height of the boom.
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Table 4.5.: Taxes, grants and budget balance 2006-2007, all numbers in percent of GDP 2006 Mining taxes Other taxes Income taxes Value-added tax Excise taxes Customs duties Nontax Grants Project and budget support Debt reduction Overall balance of budget Including grants Excluding grants Source: IMF, 2009: 17 What is perhaps most interesting from figure 4.5. is the relative size of donor grants compared to mining taxes. In 2006 where debt relief was granted, donor funding was more than 43 times larger than mining revenue. This shows how high the stakes were for the state in giving in to the demands of the donors in relation to debt relief. In 2007, after debt relief was delivered and thus a year when donor funding resumed its regular level, funding from donors was still more than 3 times the size of revenue from mining. At the same time it is clear from figure 4.5. that the governments budget only barely balanced due to donor funding. Without these funds, there would have been a budget deficit of 4.8 percent of GDP in 2007, at the height of the mining boom. The coalition between the government and the donors makes sense judged by these numbers. Whereas the traditional resource curse theory sees the mining sector in a boom period as a cash cow providing seemingly unlimited revenue for the government, the situation in Zambia points to a completely different picture. The state could secure much more funding by staying on good terms 18,6 -7,4 -0,2 -4,8 4,6 21,4 4,6 0 0,6 16,1 7,5 4,6 2,1 1,9 0,8 26 1,4 17,9 8,4 4,9 2,6 2 0,7 4,6 2007
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with the donor community, and so they did, despite having to take politically controversial decisions. Rent-seeking behavior from the government had changed from targeting the mining sector to targeting the donors. Arguably, this change in focus can go a long way to explain the improvement in macroeconomic performance in the boom of the 2000s, documented earlier10. However, the dynamics of the boom spelled political trouble for the government and its reliance on donor interests. As prices soared domestic discussion on whether the country was getting a fair share from the copper exports surfaced. In the midst of this discussion the DAs were leaked to the public and the details of the investor-friendly agreements were available for all to see. Combined with several high-profiled stories in the press of dismal safety standards and poor working conditions for workers at the new mines a public outrage followed (Fraser & Lungu, 2007: 627). The opposition parties, especially the Patriotic Front (PF) quickly sought to capitalize on this outrage. In both the elections of 2006 and 2008 they promised to increase taxes on the mines and punish investors who did not follow domestic regulation on working conditions (Lungu, 2008; Ratty, 2008). The following excerpt from the PFs manifesto from the 2006 election campaign demonstrates the pro-urban and pro-mining union stance taken by the party: The main beneficiaries of the MMD regime, apart from relatives and friends, are mostly foreigners. . . . [The MMDs] leaders seem to have no conscience, because they have not been moved by the plight and suffering of the Zambian workers, who have been reduced to daily casual employees in their own land, while foreign firms and consultants feast on their sweat and diminishing natural resources (quoted in Fraser & Lungu, 2007: 626) On this platform The PF improved their election result between 2006 and 2008 with 9 percentage points of the votes, while MMD lost 3 percentage points, with only 2 percentage points separating the two parties in 2008 (Electoral Commission of Zambia, 2009). The electoral landslide was primarily made possible through the PFs strong stand on the Copperbelt, where they secured 65% of the votes in 2008 (ibid.). The opposition had clearly found a powerful message in attacking the governments stand towards foreign investors.
10
This has to do with the fact that most bilateral and multilateral aid is only disbursed on the condition that the country adheres to the structural benchmarks set forth by the IMF. These benchmarks are overwhelmingly focused on core macroeconomic indicators (see IMF, 2010: 33-35 for an overview of the benchmarks).
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The message was most popular among people living in urban areas, and as the election result from the Copperbelt indicates, especially in mining communities. The unions saw in the PF a new possibility for political inclusion after almost two decades of MMD suppression (Ratty, 2008: 1-2). The unprecedented level of organised political opposition to the MMD did not, however, only come from the political parties and unions. Unlike in period one where most of the civil society had been supressed by the one-party state, period two had seen an opening up of the space for civil society to organise more or less freely, often encouraged and funded by donor support. Civil society organizations were openly against the neo-liberal economic reforms of the MMD government and the need to tax the mines became a key issue for them11 (Fraser & Lungu, 2007: 617). A testament to the unfairness of the DAs was the donors change of stance during the boom. While the World Bank and IMF had pressed through the privatization and liberalization they too began to argue that the DAs were too favorable to the investors (Lungu, 2008: 9). With civil society, the opposition, the unions and even donors arguing for a change in the tax regime surrounding the mines it would seem that a new political course was a possibility in Zambia. With this also came the possibility for government to forge a new coalition, one that would bring more revenue to the Zambian state from mining and thereby break the flawed development model put in place in the 1990s. Initially this is exactly what the MMD government attempted. In 2008 the Mwanawasa MMD government decided to annul the DAs and introduced the new tax regime. This was done with with massive support from the non-governmental organisations and civil society in general and was seen as an attempt to counter opposition party claims that it had sold Zambias sovereignty (Lungu, 2008: 9-10). This was a bold move and brought the government in direct confrontation with the mining MNCs. However, as the financial crisis hit Zambia in 2008 the changes were watered down after immense pressure from the MNCs that threatened to pull out their investments. Furthermore, the mines threatened legal action as they argued that the government did not have the authority to break the DAs and consequently they did not pay the new taxes while they were in place (Lungu, 2008: 12).
11
Arguably, one could credit the civil society organizations with bringing the issue at the top of the political agenda. It was two reports from civil society organizations that initiated much of the debate on mining taxation in Zambia (the reports being Fraser & Lungu, 2007 and SARW, 2009).
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The fact that the mines were granted concessions despite the immense pressure on the MMD government for higher taxes shows the degree of power that the mines have over the government. It would thus seem that the mining MNCs and the government have become close allies, where both stand to benefit from cooperation. The benefits to the mines are quite obvious in terms of less regulation and hence higher profits. What are not as obvious are the benefits that the government gets form this arrangement. From the viewpoint of the resource curse theory it does not make sense why the government actively chose to forego additional revenue they could have used to buy support and at the same time please domestic constituencies. However, given the political realities in Zambia after privatization and liberalization I will argue that there are at least two good explanations. Firstly, although there is widespread agreement and support for putting in place higher taxes on the mines, the politics of doing so is not the clear-cut win-win situation for the government that it first appears. With the voters on the Copperbelt being the key to winning the next election, any political party wishing to win the presidency will have to stay on good terms with this electoral group. As the unions are the most powerful political force in this province, their support is crucial. And while it is true that the unions have supported the drive to tax the mines more (Southern Times, 2010), they also have an interest in keeping as many jobs in the sector as possible, which liberal regulation might ensure. Most importantly perhaps, the unions have also insisted that if any investor pulls out of the country, the state should re-nationalize the abandoned mine to avoid job losses. This situation became relevant during the financial crisis in 2008. During the crisis the Luanshya Copper Mines closed down operations, citing the low copper prices as the cause. MUZ quickly called for a nationalization of the mine and initially the MMD government promised to intervene. However, the President soon backtracked to the fury of the MUZ (Zambian Chronicle, 2009). As Zambias budget is only barely balancing even in these economic boom years, and public borrowing is limited to 0.6% of GDP as part of the IMF conditionality (Weeks, 2008: 9) it would be a disaster for the government to have to give into calls for re-nationalizing failed mines. As such, one could speculate that it was in fact the pressure of the mining constituency coupled with the need to stay on good terms with the IMF that created the political need to water down the new tax system. Support for this explanation can also be found in the PFs position on taxing the mines. As already described, the PF based much of its popularity on promising to tax the mines more. However, in 2008 during the financial crisis they changed their position overnight, arguing that jobs needed to be
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protected even if this meant that the new proposed increases in taxes had to be abandoned (Lungu, 2008: 13). As both the PF and MMD are pandering to the Copperbelt electoral groups they seem to have come to the same conclusion: Securing jobs is more important than securing more revenue for the state. Note that the mining sector as a whole was not threatened by the crisis in 2008 and the fall in copper prices, as it was only a few marginal mines that were in danger of closing, but even the prospect of a few thousand jobs being lost was apparently enough to change the minds of both the MMD and PF. A second explanation is at one and the same time highly likely but also somewhat speculative - it is the issue of corrupt ties between the state and the foreign investors. It is speculative since very little hard evidence exists of such corruption. However, as I will argue, it is highly likely that it is a factor in Zambian politics. This is the case since corruption is endemic in the country12. A study on constraints facing business in Zambia sheds some light on this otherwise murky issue. The study asked business representatives in Zambia to rank constraints facing them. Among foreign investors 51 percent ranked corruption as a major constraint. The respondents estimated that a typical firm on average spends 1.7 percent of their total revenues on bribes (World Bank, 2004: vi). Seeing that the mining sector is the largest business sector in the country with the highest earnings, and at the same time is the most favored by government in terms of regulation it would seem unlikely that they are not part of this wider picture of corporate corruption. Assuming the mining sector pays 1.7 percent of its earnings in corruption this would amount to no less than 47.3 million USD in bribes per year during the boom13. No doubt this is a speculative estimate but it none the less shows the potential for large scale corruption in the sector14. In Zambia the issue of funding for election campaigns is particularly touchy. With little revenue accruing to the party from building a popular base among the wide population who live in dire poverty, the parties are keen to attract funds from the business sector. This was highlighted by President Banda in a recent speech at a MMD fundraiser:
12
Transparency Internationals Corruption Perception Index ranks Zambia as number 101 out of 178 countries in terms of corruption in 2010 (Transparency International, 2010).
13
This is estimated as 1.7 percent of the $2.7 billion earnings in the mining sector in 2008 (World Bank 2010b).
14
Furthermore, the extractive MNCs and the extractive sector in general are renowned for its corruption (see Shaxson, 2007 for a description of some of the most high profile corruption scandals concerning the oil industry in Africa).
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Dont underestimate our opponents, dont think you are the only ones with resources because you dont know where the opposition get their resources from. We have to work hard at being in good terms with the business community. Listen to them, understand their problems and do something about it. (Lusaka Times, 2010) As the economic shock therapy has meant that the MMD are no longer on a good standing with most of the local business community, it would seem plausible to suggest that the President is referring to foreign investors, not least in the mining industry. Of course such a relationship does not need to be corrupt as corporate party financing is a reality in most democracies. However, the line between due and undue influence is thin and judging by the large influence of the mining sector on government policy, it would seem relevant to describe the situation as outright state-capture by the mines. State-capture describes the situation in which big corporations use their large influence on weak governments to influence the regulatory environment (Kaufmann & Hellman, 2001). There is no doubt that the mining MNCs had a large degree of influence on the content of the DAs, thereby more or less writing their own regulation. As well, the government turnaround on taxes in 2008 also points to a large degree of influence from the mining sector on government policy. The fact that the government refuses to tax the mines more, despite the backing of the corporate friendly World Bank and IMF arguably shows the large influence of the mines on the government. The way the DAs were negotiated no doubt was conducive for building the close ties between the government and the mining MNCs. The negotiations took place between the executive and the mining MNCs without any involvement of Parliament and with no disclosure of the contracts that resulted. As the Permanent Secretary of the Ministry of Mines has later revealed, the regulation surrounding the mines were a result of the wishes of the new investors, not the government (Lungu & Fraser, 2007: 11).
4.5.
Summing up: Booms then and now ownership and regulation as the missing piece
From the above it should be clear that the change in ownership and regulation of the copper sector in Zambia has had large effects. Firstly, it was shown in the economic analysis that the macroeconomic management of the second boom has been vastly superior to that of the first boom period. The change in unearned income, 66
brought about by the privatization and liberalization of the copper sector was highlighted as the defining factor in explaining this. Secondly, the political analysis showed how the privatization and liberalization of the Zambian economy, including the mining sector, altered the behavior of the government between boom period 1 and 2. In the first period the fit between the resource curse theorys three explanations and the situation in Zambia was near perfect. The boom led the UNIP government to rely on neopatrimonial redistributive policies, and rent-seeking became widespread, with especially the urban areas and the powerful unions benefitting. Furthermore, economic diversification was lost in the governments attempt to steer the economy through a bloated and unprofessional bureaucracy. The weakness of the domestic business community contributed to this strategy. As such, the governing coalition had no interest in promoting long-term development for the reasons specified by the resource curse literature. In the second period, the government came under strong external pressure from donors to privatize and liberalize the economy. The donors overtook the role of funding the government from the mines, but in return increasingly dominated and dictated economic policy, bringing about the improvement in macroeconomic management seen in period 2. The donor-government coalition, coupled with the effects of neo-liberal shock therapy meant that neither the previously strong unions, nor the domestic business community became strong actors in the second period. Hence, much of the patronage system minded at urban groups was dismantled while the politically sensitive subject of reforming the bureaucracy was not pursued as it was deemed too costly politically. Two explanations were presented for the continuation of the liberal tax regime despite strong pressure to alter this. Firstly, electoral pressures from the Copperbelt combined with the IMFs structural conditions proved one explanation. Secondly, it was argued that the state has become captured by the interests of the mining MNCs through the highly secretive privatization process. The result was a new unsustainable development model in which Zambia is being drained of its sub-soil wealth and little is done in order to diversify the economy away from copper. As in period 1, there are no strong interests in the governing coalition pressing for diversification. Table 4.6. provides a simplified overview of the difference between period 1 and 2.
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Table 4.6.: Differences between period 1 and 2 Boom period 1 Ownership and regulation of the mines Macroeconomic management Long-term development prospects of the coalition Disastrous Exemplary National / non-liberal Boom period 2 Private / liberal
Weak. Economic policy hurtful Weak. Wealth being drawn out for local business. Mismanagement of revenue from the copper sector. No constituency pressing for diversification. of Zambia with little or no compensation. No constituency pressing for diversification.
Coalition
Government and urban/union interests.
Government, donors and mining MNCs.
It would seem that the explanations presented in the contemporary resource curse literature fare much worse in explaining the dynamic during the second boom. Neo-patrimonial politics and rentseeking are still features of Zambian society, but not to the extent seen during the first boom period. Equally, state-led industrialization has not been pursued. Lastly, the level of personal taxation has increased during the boom. Consequently, the negative effects predicted by these three explanations, namely a deterioration of macroeconomic indicators, could not be given support in the second period. That the three explanations presented by the resource curse are not relevant in Zambia in period 2 should not come as a surprise as they are all founded on the assumption that the state receives massive unearned income during a boom, and has autonomy over domestic policy. Both of these assumptions have been shown to be wrong in the context of present-day Zambia after privatization and liberalization.
4.6.
Controlling for third variables: The effects of institutions
In the methodological section of this thesis it was highlighted that the comparison of the two boom periods in Zambia is complicated by the fact that there have been major institutional changes between the periods. Zambia has improved its score on all but one of the six Worldwide Governance Indicators produced by the World Bank in the period of 1996 to 2008 (World Bank,
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2010c). Freedom House has also improved the countrys score on both political and civil rights over the period of 2002 to 2009 where data is available (Freedom House, 2010). This raises the question whether the different behavior in the two booms can be explained with reference to these improvements. This is a highly relevant question as the resource curse literature has increasingly used institutional quality as the explanation of whether or not the curse emerges. If this is the case for Zambia then the focus on the strength of political actors and their coalitions and on the relationship with privatization and liberalization might be flawed. However, as I will attempt to show bellow, it is dubious that improvements in democracy and institutional quality have been a factor in changing behavior between period 1 and 2. First of all, as already pointed out in the theoretical section, weakly consolidated democracies with few checks and balances should be more likely to experience the resource curse than their authoritarian counterparts (Collier, 2007: 37). Zambia is definitely a weakly consolidated democracy, with the election in 2006 being the first relatively free and fair, and the MMD having been in power since 1991. Furthermore, few checks and balances exist on the executive. Therefore, if anything, the introduction of democracy should have increased the probability of the curse surfacing in second boom period. If there is a bias, then, it works against the findings in this thesis. However, it was noted that the electoral pressure from the Copperbelt might be one explanation of why the current unsustainable model is kept in place. Does this not mean that democracy has altered the political dynamics? Not necessarily as it must be remembered that the UNIP government also was preoccupied with maintaining a good relationship with this part of the country under one-party rule. The case for improvements in institutional quality being the determinant of changed behavior is also weak. While it is true that institutional quality has improved, it is still very low. And as specified in the theoretical section, existing studies tend to find that the institutional quality has to be at the level of the OECD countries in order to reverse the curse. To argue this is the case for Zambia seems unwarranted. The fallacy of the argument can be made clearer when Zambia is compared to other countries15. In terms of government effectiveness Zambia scores the same as Madagascar, known for its recent coup. On regulatory quality Zambia is equal to Niger, another country renowned for
15
The following comparisons are made by using World Banks Worldwide Governance Indicator scores for 2009 (World Bank, 2010c).
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its lack of development and political conflicts, including a coup in 2010 as well as famine. On rule of law Zambia scores slightly less than Gabon, a country used as one of the prime examples of how a countrys political system can be ruined by natural resources (Shaxson, 2007: 63-82). In terms of control of corruption Zambias score is almost the same as that of Liberia, a country only just emerging from a complete breakdown of the state after a long civil war. Although it is true that Zambia performs better than some of its resource-rich counterparts in Africa, such as Angola and Nigeria, it is clear that Zambia is by no means exceptional in sub-Saharan Africa in terms of institutional quality. Furthermore, and perhaps more important, the argument for institutional quality as the defining variable in resource-rich countries rely on the assumption of unearned income as the main problem. As has been argued at length this is, however, not the most pressing issue in Zambia. Lastly, many of the writers on the resource curse highlight the importance of good institutions as a means to create more accountability and transparency. These two issues are part of the standard good governance recommendations for overcoming the curse. While the Zambian political system has developed institutions that are perhaps in theory more open than under one-party rule this does not mean that accountability and transparency have actually been improved. In fact, what stands out from the analysis of period 2 is the deterioration of both the governments accountability towards the domestic population and transparency in the extractive sector. As was shown, the government has throughout the current boom period relied on the support from donors and the mining MNCs, at the expense of domestic constituencies. Accountability in a situation where government is not relying on domestic groups for support and is not in control of the policies it pursues is not the basis for meaningful accountability. Equally, the privatization and liberalization process of the mines was characterized by an extreme lack of transparency, with the DAs being negotiated secretly and kept from the public for years until they were leaked. To argue that the improvements in institutional quality have improved either accountability or transparency would therefore seem dubious. Taken together, it seems that improvements in institutional quality and democracy cannot on their own explain the different behavior observed in period 1 and 2. In contrast, I hope the analysis has shown that the links between privatization and liberalization and the change in the political dynamics in Zambia are more readily observable and plausible in explaining the differences between period 1 and 2.
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5. DISCUSSION: THE RESOURCE CURSE, OWNERSHIP,

REGULATION AND POLITICS
Having analyzed the effects that privatization and liberalization had on the occurrence and political dynamic in the Zambian case I will now turn to the task of discussing the implications of the analysis. In accordance with the hypothesis generating single case study methodology approach used in the analysis, inference to the theory of the resource curse is the prime purpose of this thesis. Therefore, the first part of the discussion seeks to develop some hypotheses from the Zambian case study that infers to the theory of the resource curse. In the second part of the discussion I will discuss whether the results from the Zambian case can be inferred to other resource-rich developing countries. This issue is more difficult to explore since the study is constrained by the single-case study approach in terms of generalization to other countries, and as such this part of the discussion should be viewed as more tentative. However, the question is highly relevant as the results from the analysis could have much wider implications, also in terms of policy prescriptions, if it can be showed that Zambia is not unique in its experience during the second boom. Therefore the issue of generalizing to other countries will be given attention.
5.1.
Inferring to the resource curse theory
In what follows, I will argue that three new hypotheses can be developed from the Zambian case study. These hypotheses infer to the theory of the resource curse and as such attempt to provide us with a better understanding of the theoretical underpinnings of the resource curse. 5.1.1. Hypothesis 1: Unearned income is an independent and dependent variable The analysis of Zambia showed that privatization and liberalization have the potential to radically change the amount of unearned income accruing to the state. As was discussed in the theoretical section, the resource curse theory sees the amount of unearned income as the crucial independent variable that sets in motion the dysfunctional effects associated with the resource curse. This understanding of the resource curse was verified in the analysis of Zambia, where the sharp reduction in unearned income accruing to the state proved vital in alleviating the negative effects described in the curse literature. 71
On the one hand then, the analysis has found strong empirical support for the contemporary explanation of the resource curse, which highlights that it is not the amount of natural resource abundance or export dependence that creates the negative effects described by the resource curse, but rather the amount of unearned income that accrues to the state. As such, unearned income is rightly seen as the independent variable in the more contemporary literature. This in itself is an important finding as it contributes to the ongoing debate on how to best measure the curse, shortly described in the theoretical section. Furthermore, the analysis of Zambia showed that using resource abundance or dependence can be a weak, and even misleading, proxy for unearned income as rents in the sector have never been higher than during the last couple of years, while unearned income has never been lower. As a database is missing on the amount of unearned income it also suggests that the preoccupation by much of the contemporary resource curse writing with statistical methods is problematic. While support has on the one hand been found for the contemporary writing on the resource curse in terms of specifying unearned income as the central independent variable, on the other hand the study also found serious problems with only viewing this variable as independent. Thus, the analysis pointed out that large amounts of unearned income cannot be assumed to be the effects of high rents in the extractive sector, as the contemporary writing tends to do (Jones, 2008: 21). This finding questions whether the key characteristic of resource-dependent states is always a seemingly endless stream of unearned income during a boom. State expansion, fostered by neopatrimonial redistributions, rent-seeking and state-led industrializations cannot be expected in the wake of a boom in states such as Zambia. This finding should have strong validity as it was shown that Zambia had reacted in this fashion during the first boom, proving that these mechanisms could take place in Zambia. As privatization and liberalization had been implemented, behavior was altered. Other changes over time, such as institutional improvements or the introduction of democracy could not be validated as sufficient explanations of this change. The explanation for the disconnection between rents and unearned income was found to be regulation and the ownership form. Therefore, a hypothesis of this thesis is that unearned income is itself a dependent variable, shaped by regulation and ownership. Drawing on figure 2.1 from the theoretical section we might therefore change the causal understanding of the resource curse to include an interaction effect from regulation and ownership. This is shown in figure 5.1.
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Figure 5.1.: The causal effects of regulation and ownership on the resource curse
Regulation and ownership Institutions
Natural resources
Rents
Unearned income
Political dysfunctions
Economic dysfunctions
It is the hypothesis that the interaction effect of regulation and ownership structures work in the following way: Ownership of the extractive sector can be seen as a continuum from total state control with managerial control, to total private ownership with full managerial control. As ownership forms move from national to private ownership on this continuum, the weaker is the positive relationship between rents and unearned income. Similarly, as regulation becomes more liberal, the relationship between rents and unearned income becomes weaker. Regulation and ownership are treated as one variable as they turned out to be highly correlated in the analysis of Zambia. Whether this holds true for all cases where privatization has been carried out will have to be the subject of further research however. Let me elaborate a bit on the above hypotheses. It might be accepted that unearned income decreases as regulation becomes more liberal, as the tax code is perhaps the most central part of regulation in the extractive industry. However, it might be less clear why privatization also has the effect of decreasing the amount of unearned income. However, this follows from the second hypothesis explored in the next section, namely that the strength of political actors engaged in resource-rich societies is crucial in shaping the political dynamics and developmental outcomes in resource-rich societies. As was clear from the analysis of Zambia, privatization creates private actors with strong vested interests in keeping regulation liberal, which has the effect of increasing the likelihood of a weaker link between rents and unearned income than assumed in much of the literature. 5.1.2. Hypothesis 2: Institutions are shaped by politics The simplified models of the resource curse theory tend to pay very little attention to politics in the sense used in this thesis, that is, as a struggle among different actors over the distribution of scarce
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resources. Too often the state is seen as the only relevant actor, with the population at large being seen as potential rent-seekers. This situation is taken as a constant in resource-rich societies. Institutions are then assumed to alter the behavior of the actors, determining if rent-seeking behavior is profitable to engage in. This analysis has proved this simple understanding of politics in resource-rich developing countries potentially misguided. The political dynamic in both periods was complex and shaped to a large degree by the strength of non-state actors. In addition, institutional improvements in the good governance sense did not explain the alteration of behavior between the two periods. Instead, the regulatory environment and ownership, two institutional factors ignored by the vast majority of the resource curse theory, proved to be the most important factors in bringing about a change in behavior. Changes in behavior were brought about by changes in the power of the different actors, which brought about changes in the institutional frames of the economy, including ownership and regulation. Both privatization and liberalization became a reality only as the power structure between the unions and the donors tipped in the advance of the donors. As such, the case study showed that institutions can to a large degree be shaped by politics, instead of institutions shaping politics. Figure 5.2.: The relationship between politics and institutions The resource curse theory
Politics
Institutions
Politics
The Zambian case study

Institutions
This has large implications for the advice given to many resource-rich developing countries which tends to be that they should improve their institutional quality. Institutional changes are not likely to occur unless a coalition of political actors can be built for such changes. Thus, behind any institutional changes lies a political settlement among the political actors. Not surprisingly then, institutions are better viewed as the mobilization of bias towards specific groups rather than technocratic solutions to political problems, such as the good governance approach tends to view
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institutions (Leftwich, 2000: 107). A key point of the analysis is that privatization and liberalization strengthens the private extractive companies at the expense of the unions. However, it should be equally clear that institutions can also shape politics, so it is not a question of one or the other causal mechanisms. Rather, the point is that politics and institutions are shaped in a complex interaction between each other, which is a break from the existing understanding which tends to favor institutions over politics as an explanatory factor in resource-rich countries. 5.1.3. Hypothesis 3: The political actors involved in resource-rich developing countries matter According to the resource curse literature, developing countries rich in natural resources are characterized by two actors, the state and society, who for reasons specified in the theoretical section, are assumed to share an interest in redistributive policies and state-led industrialization. From this starting point the change in ownership and regulatory environment surrounding the copper sector in the Zambian case at first seems a puzzle. Why would the MMD government go out of their way to ensure that the mining companies pay as little tax as possible if both the state and society have an interest in redistributive policies, including state-led industrialization? The analysis showed that this puzzle can only be accounted for by the different constellation of political actors in the two periods. Whereas the unions and mine-workers were dominant in the first period, the donors and mining MNCs were so in the second period, creating the potential for change. Liberalization and privatization of the wider economy weakened the unions and domestic business community, whereas the strength of the donors weakened the state which made privatization of the mines a possibility. Privatization of the mines created a new strong political actor in the mining MNCs, who entered into a coalition with the state through state-capture. The political dynamic during the current boom was altered significantly as a result. Perhaps this is the most important finding of the study, as this focus on the importance of political actors in shaping the political process in resource-rich countries is lacking in much of the resource curse writing. This is especially true as the analysis showed that there are many more actors involved in the political process than just the state and societal groups. Instead, the analysis showed the importance of external actors, such as the donors and mining MNCs, as drivers of change in Zambia during the second boom. So far, very little attention has been paid to the role of external actors in curse literature:
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[the resource curse thesis] fails to give due account to external factors and, instead, treats countries as lithe leviathans with complete autonomy and foresight over domestic politics. (Jones, 2008: 22) Perhaps this omission is an outcome of the resource curses analytical fixation on the boom period during the 1960s and 1970s, in which external actors played a smaller role than today, as was also the case in Zambia. However, the Zambian case showed the external actors gained immense importance in shaping politics in the 1990s and 2000s. Thus, the donors and the government entered into a strong coalition in favor of neo-liberal reform of the economy. This produced the possibility for the government to sever the ties to the traditionally strong unions. As the effects of the reforms were felt in society, this tendency was enhanced as the economic shock therapy decimated the unions and the local private sector. In addition, aid took the former importance of the mines in funding the government. Should any doubt remain on the enormous influence that donors had over the government in the 1990s one only needs to look to the decision of privatizing the mines, which the government tried to prevent but nonetheless became reality after donor-pressure. The privatization itself created a new coalition between the MNCs and the government. The consequence was liberal regulation, including a minimal tax-take from the mining sector. It should be clear from the analysis that the unsustainable model of development in place in Zambia today is the direct outcome of these political dynamics, and are kept in place by the strength of the actors involved in modern-day politics in Zambia. Therefore, the simple rent-seeking model of dysfunctional dynamics being promoted by the ties between the government and the rent-seeking population is not sufficient in understanding Zambian politics today. The donor-driven process of privatization and liberalization and the subsequent statecapture by the MNCs has rendered this model obsolete. Instead, Zambian politics has to a large degree been externally driven since the 1990s. Furthermore, the analysis also pointed to domestic non-state actors that the resource curse has so far dealt inadequately with. The mining unions are one example. The Zambian case showed the immense importance of this group, especially in the first period. However, as with the external actors, the role of unions has not received the amount of attention in the curse literature that they seem to deserve. Equally, the role of NGOs during the second boom proved critical. The NGOs
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were crucial in setting the political agenda of reforming the tax code for the mines. With the help of the opposition they almost succeeded in this endeavor. The increasing importance of NGOs in poor resource-rich countries has also been noted by others (Bebbington et al., 2008: 902-903), but has hardly been covered by the mainstream curse literature. Of course, this is not to say that the actors that were important in Zambia will be important in all resource-rich developing countries. Instead, the point is that the strength of actors that are not given attention in the mainstream resource curse literature has the potential to alter the occurrence and dynamic of the curse. The point is thus that we cannot assume which actors are of importance in advance, but rather we need to subject this to empirical testing when dealing with resource-rich countries. Therefore, it would seem that the resource curse theory could gain from paying more attention to politics and the actors involved in this.
5.2.
Inferring to other countries
Having analyzed and discussed the implications of the Zambian case for the resource curse theory let me now turn to the more challenging task of discussing the implications for other developing countries. I will focus mostly on sub-Saharan Africa and Latin America as these are the regions in which most of the resource-rich underdeveloped countries are situated (Mayer & Fajarnes, 2005). Latin America has long been home to many to many of the traditional resource-rich developing countries (Auty, 1993). Sub-Saharan Africa is on the other hand relatively resource-poor. However, it has been pointed out that new reserves are likely to be found in this region16. Perhaps most importantly, the rising demand of Asian economies such as China and India is pressing African countries towards more reliance on natural resources (Mayer & Fajarnes, 2005: 24).The question then is whether the neo-liberal extraction model of Zambia is relevant for these countries. 5.2.1. The relevance of the neo-liberal extraction model of Zambia The task at hand is to demonstrate that Zambia is not an outlier in terms of its management of natural resources but can be said to be relevant for other resource-rich underdeveloped countries.
16
For example, while the African region is only home to 5 percent of proven global oil reserves it is at the same time responsible for 20 percent of new production capacity in recent years (Mayer & Fajarnes, 2005: 11).
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Firstly, it needs to be established whether other developing countries share the shift from national to private ownership forms in the extractive industry. Table 5.1. provides such an overview of ownership forms over time. Table 5.1.: Percentage of oil and gas production undertaken by foreign companies (by region) 1995 Developed economies Europe North America 46.8 17.8 12.0 35.4 10.7 9.4 40.5 2.5 2005 36.0 35.9 34.0 18.9 26.4 57.2 18.4 3.5 32.1 10.8 Change -10.9 1.1 14.4 21.8 7.7 -5.9 -8.4 8.3
Developing economies North Africa Sub-Saharan Africa Latin America & Carribb. West Asia Other Asia S.E. Europe and CIS
Source: Jones, 2008: 11 It should be noted from the figure that in the short period of ten years, there has been a major shift from national to private ownership form in sub-Saharan Africa. Not only is the shift most pronounced in this region, the level of private ownership is also vastly larger than in any other region. Latin America has also experienced a shift from national to private ownership forms, albeit to a much lesser degree. However, most of the developing countries rich in natural resources are today situated in the sub-Saharan African region (Mayer & Fajarnes, 2005), and therefore it would seem that the tendency traced in the Zambian case is in fact part of a larger shift from national to private ownership in the developing world, a point echoed by other research findings (Jones, 2005: 67-70; Campell, 2003: 4; Bush, 2004: 186). Secondly, it needs to be established that the shift from national to private ownership forms has also been accompanied by liberalization of the regulation of the extractive sector, another key characteristic from the Zambian case. Support for this can be found in numerous other studies (Breisinger & Thurlow, 2008; Bridge, 2004: 407; Campell, 2003; Bush, 2004). Overall, more the 90
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states have liberalized their mining laws since 1985 (Bridge, 2004: 407). This leads Breisinger and Thurlow to reach a conclusion somewhat similar to that found from the Zambian case study: Many of the arguments surrounding resource booms and mining-led growth were informed by pre-structural adjustment conditions in Africa, when mines were stateowned and their profits (or losses) greatly influenced government revenues. However.difficulties in taxing foreign mining companies may prevent governments from turning natural resources into public investments (Breisinger & Thurlow, 2008: 1-2) While this point has not yet played any major role in the academic discussions on the resource curse, it has on the other hand played a substantial role among NGOs focussing on the extractive industry in developing countries. Here, several reports have been produced showing that a key constraint on resource-rich developing countries today is that they are not capturing an adequate tax-take from their extractive sector (Christian Aid, 2007; Christian Aid et al., 2009; Christian Aid, 2009; NACE, 2009). The reports cover indepth case studies of such diverse countries as Bolivia, the Philippines, Peru, Guatemala, Honduras, Ghana, Tanzania, Sierra Leone, Malawi, South Africa, the Democratic Republic of Congo, and Zambia. Common to their findings is that the tax code has been liberalized in recent years in these countries, with a sharp reduction in tax revenue from the extractive sector as a consequence (ibid.). While a good overview of tax revenue from all developing countries rich in natural resources is still lacking, the work cited above provides tentative evidence showing that the tendency towards more liberal tax codes and a marked decrease in government revenue from the extractive sector is in fact part of a larger tendency in the developing world. Thirdly, the experience in Zambia showed that the move towards privatization and liberalization was to a large degree externally driven by the World Bank and IMF. Again, it seems that there is some evidence showing that this finding can be generalized to many other developing countries. Thus, it has been widely recognized that the IMF and World Bank has been the key driver of the changes in the extractive industry, especially in sub-Saharan Africa (Campell, 2003; Bush, 2004: 186; Christian Aid, 2007).
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Lastly, if the experience from Zambia is to be inferred to other developing countries rich in natural resources it also needs to be demonstrated that the effects of the traditional resource curse has not been present during the current boom in oil, gas, and mineral prices. To assess this, it will be needed to demonstrate that macroeconomic performance has been good during the current boom, as was the case in Zambia. Interestingly, such evidence also exists. In an OECD paper on the macroeconomic effects of the current boom in natural resource prices the authors note that on debt, inflation, currency devaluation and a host of other factors, both Latin American and African resource-rich countries have performed surprisingly well (Avendao et al., 2008). In fact, evidence suggests that the resource-rich economies of sub-Saharan Africa has outperformed their Latin American counterparts in recent years when focusing on macroeconomic performance (ibid.: 30). Equally telling, sub-Saharan Africa has been on a high growth trajectory since the price of several natural resources began booming in the early 2000s. The change in growth for the region has been most pronounced in the countries that are reliant on natural resources (Arbache & Page, 2009: 21). According to a Mckinsey report, 24 percent of the growth between 2002 and 2007 in Africa is attributable to growth in the extractive industry (McKinsey, 2010: 2). Equally, the current boom does not seem to have been accompanied by a new interest in ISI and state-led development in these countries. It would therefore seem that the traditional resource curse, with its focus on rising inflation, debt, and state-led industrialization, is not a key feature during the present boom in the prices of natural resources. Taken together, the above has provided evidence, albeit tentative, showing that the experiences from Zambia might be relevant for many other resource-rich developing countries. Many resourcerich developing countries seem to mimic the patterns and experiences found in the case study of Zambia: High growth and stable macroeconomic performance, under a privatized and liberalized extractive sector, pushed through by the IMF and World Bank, with a small tax-take from the sector as a consequence. This is indeed a markedly different pattern than that of the resource-rich developing countries of the 1960s and 70s. And perhaps more importantly, it is a markedly different pattern than one would expect from reading the literature on the resource curse or by judging the donor initiatives that seem to be stuck in the models promoted by this literature. By pointing to these patterns I am not claiming that all resource-rich developing countries share the experience of Zambia. To be sure, some of the biggest exporters of natural resources - such as Angola, Equatorial Guinea and Gabon - are most likely better understood with reference made to
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the old narrative of the resource curse, with its focus on large revenues accruing to the state and corruption and inefficiencies as a consequence. However, these high-profile cases should not blind us from the processes taking place in many other resource-rich countries in both sub-Saharan Africa and Latin America17. Thus, while the resource curse claims validity over time and space, the analysis presented here questions whether the changes in terms of privatization and liberalization has not limited the validity of the resource curse over time. If the above is accepted, this has wide implications. Bellow I will focus on two such implications in developing the last two hypotheses. 5.2.2. Hypothesis 4: History matter The idea of a generalized resource curse hinges on the premise that we can infer from the past to the present, as Collier rightfully acknowledges in passing: the current boom [in commodity prices in the post-2000 years] is, if past behavior is repeated, likely to have strongly adverse long-term effects (2008: 29, own highlight) However, if we can infer the results from Zambia to a wider population of developing countries, as argued above, it suggests that past behavior cannot be assumed to repeat itself in the countries that have opted for private ownership and liberal regulation of their extractive sector. This highlights a potential problem inherent in the resource curse in terms of being able to infer over time. I will argue that this problem stems from a methodological shortcoming in the curse literature. Thus, in order to infer from the past to the present and beyond, one ideally needs to demonstrate that ones hypothesis holds true for several periods of time. In this regard it is problematic that almost all studies on the resource curse, whether statistical or case studies use almost the same time series to test the hypothesis, namely the period of 1960-2000 (Oskarsson & Ottosen, 2010: 1068). As with the price of copper, most commodity prices have been declining since the 1980s until the early 2000s and therefore the period essentially tests the same phenomenon, namely the boom in commodity prices during the 1960s and 70s. This goes against the warning that King, Keohane and Verba have given in their seminal book on designing social inquiry:
17
The resource curse literature has previously been criticized for focusing too much on the worst-performing cases (Basedau 2005: 31).
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We should always try to avoid using the same data to evaluate the theory that we used to develop it (1994: 46) This raises the question of whether the resource curse is a historical phenomenon that is bound to the boom in commodity prices in the 1960s and 70s, or whether it holds true irrespective of time. This is deemed highly relevant as a few studies are beginning to indicate that some of the negative effects predicted from the resource curse do not hold true in more recent years (Oskarsson & Ottosen, 2010; Jones, 2008: 28pp.). If we can infer the results from Zambia to a wider population of developing countries, as argued above, it suggests that the resource curse theory might not be relevant for a wide number of resource-rich countries today, where many have adopted private ownership and liberal regulation. This is especially important in terms of policy implications of the resource curse, as it can be highly problematic to prescribe solutions based on a misguided understanding of what the problem is. The donors tend to see the problem of resource-wealth as a problem of state-failure in terms of handling revenue (Karl, 2007: 270), which does not seem to be the largest problem in Zambia and perhaps many other developing countries. This is in no way to say that this is not an important area for reform, but just to point out that it might not be the most important one for the countries whose largest problem is not that they receive seemingly endless stream of revenue, but rather that hardly receive any at all. In promoting the hypothesis that history is of importance, however, I not only aim at the shift in ownership and regulation that has marked recent years. History also matters in a much broader sense, both in terms of ideology, and the strength of different political actors. I will explore this argument by returning to the Zambian case to show how these factors had importance. In 1962 opposition leader in Zambia, Harry Nkumbula, is quoted saying Kaunda is not carrying out his own policies. They are Nkrumahs ideas (quoted in Macola, 2008: 29). While polemic, the fact of the matter is that Kaunda did not decide on his policies in a vacuum when he became the first leader of independent Zambia. The opposition charged him with being influenced by Kwame Nkrumah, the first president of independent Ghana18. Nkrumahs blend of nationalism, socialism and anti-colonialism was to become very popular during the move towards independence and
18
Ghana gained independence in 1957 as one of the first sub-Saharan African countries and Nkrumahs ideas and actions were followed closely by many aspiring African leaders around the continent.
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immediately after in Africa. Thus, the period around the struggle for independence and the early post-colonial years came with a strong ideological preference for state-led industrialization, and national control over the means of the production, especially in the strategically important extractive sector. In the resource curse literature the theory is usually dated to the late 1980s. This is misleading. Decades before this writing, the idea of a curse from resources was already widespread, albeit the explanation for this was much different. Nkrumah himself can be taken as an example. Thus, long before Karl coined the term the paradox of plenty (1997), synonymous with the resource curse, Nkrumah wrote of this paradox: Africa is a paradox which illustrates and highlights neo-colonialism. Her earth is rich, yet the products that come from above and below her soil continue to enrich, not Africans predominantly, but groups and individuals who operate to Africas impoverishment (Nkrumah, 1965: 1) Likewise in Latin America, writer and activist Eduardo Galeano wrote of the black curse of petroleum in 1971 (Galeano, 1997: 156). According to Galeano poverty was an outcome of the continents natural resource abundance: Our wealth [Latin Americas] has always generated our poverty by nourishing the prosperity of others the empire and their native overseers. In the colonial and neocolonial alchemy, gold changes into scrap metal and food into poison (Galeano, 1997: 2) These ideas drew heavily on the dependency school of development, highly influential in these years (Leftwich, 2000: 60-63). Common to these thoughts were the ideas of foreign exploitation, based primarily on the exploitation of the poor countrys natural resources. Nationalization of the natural resource sector was therefore seen as a way of breaking this structure of plunder (Galeano, 1997: 205). To be sure, these ideas were also present in Zambia, as the opposition pointed out in the quote above. The ideological climate of the day might therefore very well have been a factor in promoting the types of policies that were pursued in the first period.
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Equally, it can also be claimed that behavior during the second boom was in some part shaped by the ideological climate of the day. Thus, as the economic plight of the many developing countries that had pursued statist policies during the 1960s and 1970s became visible in the 1980s, a countermovement against these policies was initiated. This countermove was in large part led by the World Bank and IMF, who became increasingly influential in setting the development agenda in the 1980s and onwards. During this period, structural adjustment, a euphemism for neo-liberal economic reform, became the demand from these institutions (Leftwich, 2000: 49-50). Likewise, the fall of the Soviet empire and the discrediting of socialist thinking in its wade made neo-liberalism more dominant. The WTO has at the same time institutionalized liberal trade rules which the developing countries are constrained by (Wade, 2003; Chang, 2003). To expect that ISI and state-led development would re-emerge in such an institutionalized ideological climate might be misguided. For many developing countries it would mean breaking WTO rules as well as risking donor finance. These factors again are to be found in the Zambian case study. Thus, the neo-liberal reform drive was not only a consequence of the World Bank and IMF, but also had some support in the MMD government, who accepted the neo-liberal explanation of past economic decline and internalized the ideas in this agenda. Thus, there seems to have been a learning process from the 1960s to the 1990s, which discredited the statist development model of the first boom, as well as pressure from the IMF and World Bank to follow the neo-liberal development model. Taking these points together, it would seem that history plays a role in terms of the conditions that are in place before a boom occurs. It is therefore problematic that the resource curse assumes that past behavior is repeated in an endless vicious cycle, as this does not seem to be the case. Instead, it seems that each boom period has been characterized by its own ideological climate, which has been shaped and enforced by actors such as the WTO, IMF, World Bank, and the state. This has made some actions and policies more likely than others. To expect statist development ideas, such as ISI, to resurface during the current boom might therefore be misguided.
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5.2.3. Hypothesis 5: The problem of natural resources needs to be reframed The analysis showed that limiting unearned income through liberalization of the tax code had the effect of removing the hurtful political and economic dysfunctions described by the resource curse. Macroeconomic management has been exemplary, and the copper sector has rebounded through foreign investments after years of neglect and mismanagement. Furthermore, in exploring whether the findings from Zambia could be inferred to other countries it was also noted that resource-rich developing countries have fared much better during the recent boom in terms of macroeconomic performance. Are privatization and liberalization then the solution to the resource curse? As I have argued in the analysis, this is not the case. The situation in Zambia is not sustainable, with the country being drained of scarce resources needed to promote development, while the extractive sector is externalizing costs of pollution, maintenance of infrastructure and the like to society. This raises the question of whether the current understanding of the problems involved in resourcerich countries is adequately understood. As has been documented in the theoretical section, the resource curse literature promotes the idea that seemingly endless streams of unearned income is the problem as it distorts the political system, while the arguments made above have suggested that it is the exact opposite which is the problem for Zambia and other developing countries namely that they are hardly receiving any revenue from their natural resources. Needless to say, this makes quite a difference in terms of policy implications. This leads me to promote my fifth and final hypothesis, namely that the understanding of what constitutes the challenge for resource-rich developing countries needs to be changed. Rather than seeing the problem only as one of managing large amounts of revenue from the extractive sector I would argue that the experience of Zambia and other developing countries reminds us that the challenge to resource-rich developing countries is not only to ensure that they spend the revenue from the extractive sector wisely. It also includes a focus on capturing an adequate amount of the rents being generated by their extractive sector. Stating the problem of natural resources this way has large implications. It suggests that policies which seek to promote sustainable development in resource-rich developing countries also need to pay attention to adequate regulation of the sector, an area so far neglected by academics. And an area in which the donors, most notably the IMF and World Bank, have helped bring about the unsustainable situation found in present day Zambia and elsewhere.
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6. CONCLUSION
This thesis has pointed to a flaw within the resource curse literature. While the analysis showed that privatization and liberalization of the extractive sector have the potential to radically alter the resource curse phenomenon, the literature on the curse has so far neglected this area. While the traditional resource curse specifies that the paradox of plenty arises as the state receives seemingly endless amounts of revenues from the extractive sector, the problem in present-day Zambia is the exact opposite; it hardly receives any revenue from the sector and as a consequence society is not reaping the benefits that the current boom could have provided. While macroeconomic performance has been improved after privatization and liberalization, it was therefore argued that the current model is not sustainable in terms of development. From the current resource curse literature it is difficult to understand why this state of affairs has come about. After all, this literature assumes that politicians in resource-rich countries with weak institutions will seek to capture rents from the extractive sector in order to redistribute them to gain politically. Sense was made of this puzzle by analyzing the politics behind the two separate booms in post-independence Zambia. Donors and the mining MNCs proved to be crucial in bringing about this new situation. These actors have been notable only by their absence in much of the contemporary writing on the resource curse. The thesis developed five hypotheses that have large effects for both the theory of the resource curse, and potentially for other resource-rich developing countries. Firstly, unearned income does seem to be the crucial independent variable that sets in motion the negative effects associated with the traditional curse literature. However, unearned income is also a dependent variable in itself, as it is shaped by regulation and ownership within the extractive sector. From these two insights arises the need to focus on ownership and regulation in resource-rich developing countries. Secondly, the good governance type institutional approach adopted by the mainstream resource curse literature and many donors was found lacking. While institutional quality was low in both periods, the outcome in terms of managing the two booms still differed radically. It was argued that this was more a result of the different political dynamics in the two periods, and thus highlights a need to acknowledge the interactions between institutions and politics. Thirdly, it was hypothesized that the political actors involved in resource-rich developing countries matter. Only by adopting such a focus could the decision to privatize and liberalize the copper sector be understood, as well as why the unsustainable model has been kept in place throughout the second boom.
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The last two hypotheses were focused on implications which might be drawn if the results from Zambia can be inferred to other resource-rich developing countries. This was found to be relevant as there were some indications that the results are in fact inferable. The fourth hypothesis therefore argued that history matter in terms of the resource curse. It is possible that the resource curse is primarily a historical phenomenon associated with the boom of the 1960s and 70s, where state ownership prevailed. The ideological climate during that period, contrasted with the ideological climate of today, provided further support for this hypothesis. Lastly, the fifth hypothesis argued that the problem of resource-wealth in developing countries needs to be reframed. So far the problem has mainly been understood as one of how to manage the revenue from the extractive sector. However, there seems to be a need to acknowledge that a first step in promoting development in resource-rich countries is to ensure that these countries capture an adequate share of the rents form the extractive sector. Taken together, these five hypotheses provide a new frame for understanding the resource curse. If these hypotheses are correct, they have large policy-implications. However, it might be wise to exercise some caution in drawing new policy-prescriptions. There is a need to study the issues raised by this thesis in more detail, and to tests the hypotheses on other cases, as the single case study methodology limits the potential for inference, especially in terms of inferring to other countries. Let me end the conclusion by returning to the motivation for this thesis, namely the potential for development that the current boom in the price of natural resources has brought about. While the resource curse cautions us in being too optimistic about the developmental potential of the boom, this thesis has shown that the negative effects of the resource curse are in no way deterministic. In discussing whether the results from the analysis could be inferred to other resource-rich developing countries, it was noted that macroeconomic performance has been much better during the current boom, both in resource-rich countries in sub-Saharan Africa and Latin America. Furthermore, overcoming the resource curse does not necessarily seem to be predicated on the difficult and longterm task of building institutional quality. However, at the same time the outlook for development under a fully privatized and liberalized extractive industry was argued to be weak, as the model primarily benefits foreign investors. In present-day Zambia the mining boom might even have a negative impact on long-term development, in part due to the costs externalized to society. As such, it would seem that there might be a need to change the distributional balance between foreign
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investors and the host countries in which they operate if the current boom is to provide long-term developmental gains. If a better balance can be struck without compromising the good macroeconomic performance there would seem to be hope for cautious optimism on behalf of the millions of poor people living in resource-rich countries.
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Privatization and Liberalization of The Extractive Industry in Zambia - Implications For The Resource Curse

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PRIVATIZATION AND LIBERALIZATION OF THE

EXTRACTIVE SECTOR IN ZAMBIA

- IMPLICATIONS FOR THE RESOURCE CURSE

Mineworkers at a copper mine in Chambishi, Zambia. Credit: Christian Aid/David Rose

Master thesis, Aarhus University, Department of Political Science

2.2.1. 2.2.2. 2.2.3. 2.2.4. 2.3.

2.3.1. 2.3.2. 2.3.3. 2.4.

3.3.1. 3.3.2. 3.3.3. 3.3.4. 3.4. 4.

Summing up on the methodological approach ................................................................................ 34

4.1.2. 4.1.3. 4.1.4. 4.2. 4.3.

4.3.1. 4.3.2. 4.4.

4.4.1. 4.4.2. 4.4.3. 4.5. 4.6. 5.

5.1.1. 5.1.2. 5.1.3. 5.2.

5.2.1. 5.2.2. 5.2.3. 6.

LIST OF FIGURES AND TABLES

2. THEORY: THE RESOURCE CURSE, OWNERSHIP,

Demarking the resource curse

What causes the resource curse?

Challenges to the resource curse

Theoretical deliberations on ownership structures and regulation

A theoretical framework for the analysis: Bringing politics back in

Why and how to use the case study approach?

Boom in the price of natural resources

Period 2: Foreign private resource extraction

Boom in the price of natural resources

Giving these criteria I will argue that Zambia is an optimal case.

Operationalizations connecting theory with data

Summing up on the methodological approach

Comparing the economic management of the two booms

Government 61.4 revenue from copper exports (% of total government revenue)

The political dynamic during the first boom

1991-2010: The privatization and liberalization agenda and its consequences

Government and urban/union interests.

Government, donors and mining MNCs.

Controlling for third variables: The effects of institutions

5. DISCUSSION: THE RESOURCE CURSE, OWNERSHIP,

Inferring to the resource curse theory

The Zambian case study

Inferring to other countries

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