June 05, 2002

A Truly Loathsome Toad

So I stopped by Andrew Sullivan's weblog this morning to see what's what, and was confronted with a short item which read, in its entirety:

SELF-PARODY WATCH: "Special Report: Zambian Copper," - a headline from this week's Economist.

At first, I genuinely didn't get the joke. You see, I'd read the Economist's Zambian copper story. It was one of the most interesting (and depressing) articles in this week's edition: the failure of privatization in southern Africa, 15000 workers who may lose their jobs, a mining complex that once produced 10 percent of the world's copper so damaged by two decades of neglect during nationalization that now there appears to be no way--not even if the mineworkers of Zambia work for free--that the mines can produce more in value than they take in, the fact that Zambia has little else worth exporting besides copper, whether the key flaw lay in the decades of nationalization or in the transformation of the privatization program into a "looting exercise."

Why, I wondered, does Andrew Sullivan consider this--interesting and important--story to be a big joke?

But then I began to imagine what the inside of Andrew Sullivan's mind must be like...

Look! The Economist thinks it should report on something happening to Zambians! Ha, ha, ha! Look! The Economist thinks somebody wants to read about copper mines! Ha, ha, ha! What a joke! 15000 of the highest-paid workers in Zambia about to lose their jobs! How rich! What wonkish fools those writers and editors at the Economist are! Why are they writing about the failure of neoliberal development strategies in southern Africa when they could be writing about my career as a Shakespearean actor? What pathetic weenies they are!!

I feel slimed. I need to go sponge myself off...



Zambian copper

Tragically undermined
May 30th 2002 | JOHANNESBURG AND LUSAKA
From The Economist print edition



Only two years ago, Zambia's rich copper mines were privatised. Now they are struggling to stay open. Their fate is an object lesson for the rest of Africa

ZAMBIA'S copper industry, which only last year still boasted a rosy future, seems to be staggering towards a rather gloomier end. A group of worried bystanders—the World Bank, the Zambian government, private investors, the mine workers and their families—are looking on, wringing their hands. Some 15,000 jobs and Zambia's biggest industry are threatened by the mines' possible closure. What has gone wrong?

Consider first the invisible hand of the market. Zambia's copper is too expensive. Two years ago, when the mines were privatised, it cost 100 cents to dig out every pound of copper. But the world price at the time was just 84 cents. Last year, efficiency improved and the Konkola Copper Mines (KCM, the country's largest) turned out a pound of copper for 85 cents. But that, sadly, was still well over the market price, which had by then fallen to 75 cents (see chart).

It is not market forces alone, though, that are killing KCM. Other copper mines have also been hurt by low prices, but the more efficient ones in Latin America are likely to survive. The company that is fleeing Zambia, Anglo American, is not fleeing copper. Indeed, it is ready to spend $1.3 billion on a copper mine in Chile.

Instead, look to other culprits: corrupt and vacillating politicians; chronic mismanagement; complicit donors; and investors worried by “political risks”. In short, the same cast of characters so evident in other parts of resource-rich Africa. The tale of Zambia's mines should be a warning to all of them. In the words of one South African mining analyst: “It is a tragedy, a case study of what happens when the consequences of bad policies endure.”


Copper cropper

The mines were once the pride of southern Africa. At their peak they produced 12% of the world's copper; by the mid-1970s 700,000 tonnes were being dug out in northern Zambia every year. Copper wealth helped to make Zambia one of Africa's most urbanised countries. Although copper's contribution to the economy has declined, it remains uniquely valuable for the foreign exchange it earns. In 2000, the metal was still Zambia's main export, despite the mines' long-drawn-out decline. But already by then production had fallen below a third of its peak.

Donors then insisted that aid to Zambia, worth around $1 billion a year in the mid-1990s, be made conditional on the government's privatising the mines, which it had owned and run since 1970. In 2000, a debt-relief package of $3.8 billion was promised to ease the sale, making Zambia among the biggest recipients of official aid in sub-Saharan Africa.

Frederick Chiluba, the country's president from 1991 until early this year, set about the task of privatising with some zeal. Of 287 state companies intended for private buyers, 251 have been sold. By far the most important was KCM, but it took Mr Chiluba nine years of haggling finally to agree to its sale. In 1998 he turned down an offer of $165m as insultingly low. The value of KCM slumped lower and lower, along with the price of copper, until a consortium of buyers, led by Anglo American, paid a mere $90m for it in March 2000. At the time this was hailed as a bargain for Anglo and its partners, and also as a great opportunity for Zambia to kickstart its economy with more private capital.

The mining company boasted that it would take only 12 months to make KCM profitable and “world class” once again. Journalists were shown bustling workers and gaping open-cast pits, and reminded that investment had boosted the whole northern region. Now those boasts ring rather hollow. Anglo American said in January that it would sell, transfer or close its Zambian assets, and that it would write off $350m in the process. A month of talks in London has produced an apparent deal to keep the mines running until a new partner is found. But any new company will have to invest heavily—or the mines will remain under threat.

In retrospect, Anglo clearly made a mistake going back to Zambia. The company says it was surprised by the low copper price and by how rotten KCM had become. “We underestimated the state of the copper mines when we assumed management,” says Tony Trahar, Anglo's chief executive. More precisely, the mines had been looted and the machinery stripped. Vehicles had been left to rust and shafts allowed to flood. Even malaria, once defeated, had returned to infect the workers.


Corruption costs

Kenneth Kaunda, who was president of Zambia from 1964 to 1991, says: “When we [the state] took over control of the mines we sent young people overseas to gain experience of running industries, and they did quite well.” In fact, under state ownership the mines became unproductive, inefficient and overstaffed. The “young people” had no means to invest and ended up “scavenging”—digging out the best, lucrative seams quickly, and neglecting the more costly parts which give mines a longer life. Instead of using profits to recapitalise operations, and to dig deeper into deposits when the copper price rode high, the state managers just scraped out what was easily available. In the long term that meant higher costs—and the mines' ruin.

On top of mismanagement and a lack of investment came chronic corruption. For the mines' failure, Mr Kaunda blames his successor, Mr Chiluba, and also theft by managers and politicians: “There is corruption from the highest to the lowest. Everything has collapsed,” he says. Reports by such groups as Transparency International called Zambia's privatisation programme a “looting exercise”, and parliament investigated the sale of the copper mines. It became “a case of many hands in the barrel” says one mining analyst. Even the country's own privatisation agency pointed out worrying “anomalies” in the sale of the mines.

Anglo American's consortium was mostly interested in a longer-term goal: huge deposits deeper underground. It hoped that investment in the shallow mines would produce cash to finance $300m-worth of work in a deeper and far more valuable operation at the so-called Konkola Deep Mining Project. There, 400m tonnes of copper sits in one of the richest deposits in the world. This was the main reason Anglo returned.

But Anglo now says that Konkola Deep will get no more investment. Work has stopped there and 600 workers will lose their jobs. It says that $500m-1 billion would have to be spent in the deep mines. And since the shallow ones merely swallow cash, there is no money available for the deep work. Without the deep mines, and with only eight years (and perhaps less) of deposits remaining in the shallow ones, Anglo says the prospects in Zambia are now too poor to carry on.

In January, a new government took office, a few days before Anglo announced that it planned to leave. The new finance minister, Emmanuel Kasonde, promises to keep the mines going and to find a new “strategic partner” to replace Anglo. On May 25th he said his officials and Anglo were drawing up a bidding document for KCM, so that a new partner (possibly Canada's First Quantum Minerals) could take over. Mr Kasonde says his government will offer no subsidies. The World Bank this week promised to stand by Zambia “during this time of crisis.” But even if a deal prolongs KCM's life for a few more years, copper's contribution to the economy seems bound to continue to decline.


Sad conclusions

Several broad lessons can be drawn from this unhappy tale. The first is pushed by Laurence Clarke, the World Bank's representative in Lusaka. He argues that African economies must move away from dependence on a single commodity. To earn the foreign exchange needed to pay for imports and to service debts, reliance on a single commodity (like Zambia's copper) is just too risky.

Other countries riding high today because of good prices for a single commodity, such as Botswana, which is doing well from diamonds, should stimulate new, competitive industries, such as tourism. Very few of Africa's economies have been able to transform themselves from colonial-era mineral extraction and agriculture to a more diversified industrial base.

In the worst cases, the extraction of a country's lucrative resources—diamonds in Sierra Leone, diamonds and oil in Angola, oil in Nigeria—has actively encouraged a corrupt elite, fuelled wars, destroyed state institutions and distorted exchange rates. Some analysts wonder whether much of Africa would not be better off if its oil and diamonds were simply left in the ground.

A second lesson for Africa is the long-term cost of delaying privatisation. It was bad luck that the copper price slumped as Zambia's government dithered over the sale of its mines. But if they had been sold five years earlier, the buyer might have had time to invest and dig down to the lucrative deep deposits while the copper price was high, and would then have stayed in business for another decade at least. The delay simply meant there was more time for looting and for the mines to become less efficient.

Another weakness shared by Zambia's mines and much of the rest of Africa is the lack of capital investment. David Hale, chief economist with Zurich Financial Services, believes that the shortage of foreign direct investment (FDI) is a chronic problem for the continent. He reminded a mining conference in Cape Town recently that in 1980 Africa got nearly a sixth of the world's total FDI; by 1999 it attracted less than 7% of it.

African countries invariably cluster at the bottom of annual lists of FDI per head. Remove tens of billions of dollars invested in oil installations in Nigeria, Angola, Gabon and (more recently) in Sudan and Equatorial Guinea, and the stock of capital invested elsewhere in the continent is pitifully small.

Progressive African leaders are acutely aware that lack of capital can put paid to the continent's development. South Africa's president, Thabo Mbeki, has spearheaded a plan to attract more. Known as the New Partnership for Africa's Development (Nepad), it proposes that member countries do more to tempt foreign and local investment by fighting the sort of ills that plagued Zambia's mines: corruption; mismanagement; and a lack of respect for the law or for long-term progress.

In return, it is hoped that rich countries will direct more aid, free more trade and encourage private investment. The Nepad team calculates that if Africa were to get an extra $60 billion-70 billion a year in foreign investment, its economies could grow fast enough to give them some hope of reducing poverty. But change is always a child of politicians' whims. Even Mr Mbeki's government, relatively friendly toward foreign investors, is now considering weakening mining firms' mineral rights—a move that, quite rightly, makes all foreign investors skittish.

A final lesson from Zambia's mining disaster: after a long period of misrule, do not expect quick, or guaranteed, recovery. Anglo American was too optimistic in believing that it could turn around decades of mismanagement and looting in one year. The longer businesses are allowed to stagnate, the harder it is to resuscitate them. Time is not on Africa's side.

Posted by DeLong at June 5, 2002 09:22 AM | TrackBack

Comments

I dunno. I think you can find the article enlightening and all, and still think Sully's joke was funny. I mean, just say it out loud. It absolutely sounds like self-parody ...

And really, the more conventional hed might have been Special Report: African Privatization, or something. Which at least sounds current, and relevant to other experiences. "Zambian Copper" just sounds self-consciously globalist and obscurantist.

Which you can think while still loving that they do it.

Posted by: Dan Hartung on June 23, 2002 11:33 PM

Way back when I was working for a dotcom, we used to have an office magazine circulation of rags like Fast Company etc. One day I brought in The Economist, and the receptionist sent around an email about adding it to the circulation list. She recommended the story on page 83 about the new Minister for Cheese from Kazakhistan. Bringing in that magazine probably delayed my getting fired by six months at least.

And Brad if youre interested the copper price fall could be part of the monetary deflation of the dollar caused by mistakes at the Fed, the effects of which are undermining the US and world economy.

Posted by: Eric M on July 8, 2002 10:44 AM
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