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Working Paper No 2009/13
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The implications of mine ownership for the management of
the boom: a comparative analysis of Zambia and Chile
Elva Bova*
ABSTRACT
This paper assesses the relevance of mine ownership for the management of the resource
curse. It first indicates how macroeconomic management is paramount to cope with the
shocks and the instability induced by commodity prices’ behaviour. Then it underlines that
under private ownership the space for fiscal and monetary policy results to be substantially
reduced. The paper also analyses and compares the experiences of Zambia and Chile in the
management of the current copper boom and maintains that the existence of a state-owned
enterprise for copper has greatly contributed to the positive economic performance in Chile.
Yet, the study concludes that ownership is a necessary condition but not sufficient condition
to escape the resource curse.
Key word: mining, fiscal policy, commodity boom
* Elva Bova is a Doctoral student of the NCCR individual project on “Primary Commodities” and a PhD candidate in the Economics
Department of the School of Oriental and African Studies, University of London.
NCCR TRADE WORKING PAPERS are preliminary documents posted on the NCCR Trade Regulation website (<www.nccr-trade.org>) and
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1 Introduction
A framework for the analysis of commodity booms in an era of highly liberalised economies
should take into consideration the kind of ownership and management of the commodity industry. In
this respect ownership, perceived as the degree of privatisation of the industry, should also
encompass the taxation system, for the latter provides a measure of the sector’s integration in the rest
of the economy. The distinction between kinds of ownership and taxation regimes bears its relevance
in the way a boom impacts on the economy since spending and saving responses may differ
accordingly to whom precisely gets the inflow, and this is especially the case when the foreign private
sector is considered. Furthermore, this study maintains that the presence of largely privatised
commodity industries does not only matter for the effects originated by spending and saving
behaviour, but also for the scope of macroeconomic management.
For a better understanding of the implications different kinds of ownership have during a
commodity boom, this study compares the experiences of Chile and Zambia. In the two countries
mines ownership differs greatly, with a large public sector in Chile and an almost completely
privatised copper industry in Zambia. Although additional differences between the countries ought
to be considered, there are valid grounds to believe that the kind of ownership has played a role in
the different ways the copper boom has impacted on the economy. As we shall see, the argument
appears also to be supported by the fact that the exchange rate regime is approximately the same in
both economies, with very little intervention in the Chilean foreign exchange market.
This paper also offers more insights on the way the boom has been managed through fiscal policy,
although not much can be say regarding Zambia, since very little amount of foreign exchange accrues
to the government. To a certain extent, however, one can assess whether fiscal policy has been procyclical, meaning that the government has increased spending and this has exacerbated the impact on
the currency, or whether it has not accommodated the shock.
The paper is structured as follows. Section 6.2 provides the analytical framework of the paper and
reviews issues surrounding privatisation of state-owned enterprises (SEOs) in developing countries.
More particularly, we examine how the literature has treated the effects of the reform on fiscal policy
while very little has been written on the way the reform impacts on foreign exchange management,
and consequently on the currency. Section 6.3 provides the contextual framework for the paper and
illustrates the privatisation reforms and taxation regimes in the two countries. In section 6.4 we
compare the fiscal responses to the boom, while in section 6.5 the monetary ones. Section 6.6
concludes.
2 Privatisation reforms and macroeconomic policy
In its broaden conception privatisation identifies a process by which the state’s role within the
economy is reduced while at the same time the scope for the participation of the private capital is
extended (Young 1991). The process entails the transfer “from the public to the private sector of the
ownership and/or control of productive assets, their allocation and pricing and the entitlement to the residual
profit flows generated by them” (Adam et al. 1992: 6).
In line with the neoliberal revival of the 1980s, privatisation started as an initiative propounded
and embraced by industrialised countries, mainly the UK and the US, and was subsequently taken on
by developing countries. As expressed in Bennel (1997), within the World Bank and IMF structural
adjustment program, privatisation became “the super ordinate medium long term objective” everywhere
in Africa (1997:1785).
There are usually two main motivations advocated for privatisation of state-owned enterprises
(SEOs) (Adam et al. 1982, Pinheiro and ….). On the one hand is the need to enhance efficiency in
obsolete public companies while promoting the crowding in of the private sector; and, on the other
hand is the rationalization of public finance, usually in terms of increasing revenues to alleviate the
fiscal deficit, which will result from the inflow of privatisation receipts, from corporate taxes and
royalties but also from the elimination of state subsidies (Pinheiro..Buchs Kayizzi-Mugerwa and
Adam et al. 1992).1 Empirically, the success of privatisation both in terms of efficiency and revenues is
not clear (Bhoubakhri 2002, Buchs 2003) probably because privatisation has been embraced within a
set of other economic reforms and also because more than the reform as such one should gauge the
procedures adopted, the initial conditions and competition discipline (Fine 2007).
Along with a privatisation reform a government should decide on the taxation regime to impose
on the private companies, which to a certain extent regulates the new relationship between the
private and the public sector. In the specific case of a foreign private sector, the taxation system
becomes also an indication of the degree of integration of that sector into the country’s economy.
As mentioned, one of the main assumptions of this study is that the combination of a loose
taxation regime and highly privatised commodity industry may limit the scope of macroeconomic
management during a commodity boom and this occurs mainly in two manners.
Besides these general theoretical issues, literature on privatisation has been also sensitive to the
effects on the development of the capital market (Bhoubakhri 2002) or to the implication for the
labour market, which usually constitutes the main deterrent to the policy.
1
Firstly, the privatisation regime is relevant for the fiscal budget. As mentioned, the fiscal impact
of privatisation identifies changes in government revenues resulting from the one-off increase in the
privatisation proceeds, from the elimination of possible subsidies to public owned enterprises and
from changes in the mining tax regime (Davis, Ossowski et al. 2000, Barnett 2000, Mansoor 1987).
Whether a larger private ownership determines an increase in the fiscal revenues or not depends on
the entity of all these changes.
When the economy is struck by a commodity boom, the presence of a large privatised industry
may have additional implications on fiscal policy. This is because it limits the amount of export
receipts accruing to the government and with this its possibility to save the inflow and use it to
allocate resources to key sectors of the economy. As mentioned in the analysis of the literature on
commodity booms, the best response to a shock is to stretch investments until the boom is over,
through saving in foreign assets, which also mitigates the impact on the currency. Yet, when the
private sector is local its possibility to save in foreign assets may be leveraged due to its low credit
rating. Furthermore, when the private sector is foreign, it may opt to repatriate profits and little
would accrue to the economy as a whole. Our implicit conclusion out of this is that between a private
and public response, as long as saving is the most appropriate measure, then a largely privatised
regime would limit this option.
While the issue on the effectiveness of fiscal policy has been widely looked at, the implications of
a largely private mining industry for monetary and exchange rate management have not been
similarly examined. The issue is neither considered in the literature on trade shocks nor in the
literature on absorption and spending of aid inflows. In principle, whenever the role of fiscal policy
during a boom is limited, then the government could rely on monetary and exchange rate policies to
offset the adverse consequences of the shock.
The second implication of a largely privatised commodity sector refers thus to the constraints it
poses to monetary and exchange rate policy. While when the inflow of foreign exchange accrues
directly to the government it can be saved and not spent so as to avoid exchange rate appreciation
and possible Dutch disease effects, when the inflow accrues to the private sector in order to curb the
appreciation, the central bank needs to conduct foreign exchange interventions, and this has a cost.
When purchases of foreign exchange cannot be easily sterilised then they will result in an increase in
the money supply, which under conditions of full employment may increase inflation.
Thus, a large private ownership may be of hindrance to monetary and especially exchange rate
management since it exposes the central bank to a trade-off between nominal appreciation and
inflation.
3 Ownership and taxation regime in Zambia and Chile
The economic and political history of Chile and Zambia has been long dominated by their
production and export of copper. Still at present, both economies are heavily dependent on copper,
which constitutes 40% of total exports in Chile and more than 70% of total exports in Zambia. As a
capital-intensive sector, the mining industry employs only 1% of total employment in Chile and
around 10% of the Zambian workforce.
Figure 1a
Figure 1b
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Chile: GDP, exports & copper price (1970-2005)
250
100
50
0
Exports (constant 2000 US$)
GDP (constant 2000 US$)
Copper price (right scale)
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
250
200
150
100
50
0
19
70
19
72
19
74
19
7
19 6
78
19
80
19
82
19
8
19 4
86
19
88
19
90
19
92
19
9
19 4
96
19
98
20
00
20
0
20 2
04
150
Millions
200
19
7
19 0
7
19 2
7
19 4
7
19 6
7
19 8
8
19 0
8
19 2
8
19 4
8
19 6
8
19 8
9
19 0
9
19 2
9
19 4
9
19 6
9
20 8
0
20 0
0
20 2
04
Millions
Zambia: GDP, exports and copper price (1970-2006)
Exports (constant 2000 US$)
Copper price (right scale)
GDP (constant 2000 US$)
Source: IMF-IFS, WB- WDI
While in the early 1970s both countries nationalised the copper sector, their experiences in terms
of management and ownership of the mines have diverged since the late 1970s and, at present, the
ownership structure in the two countries differs widely, with an almost completely privatised
industry in Zambia, and a largely publicly-owned one in Chile.
The nationalisation reforms
The nationalisation reform in Zambia was implemented in 1969 as part of the general strategy of
import substitution, for which the mining sector was considered to be the stepping stone (Andersson
et al. 2000). In 1982, the government created the Zambian Consolidated Copper Mines (ZCCM), out of
the merger of two state mining companies, in an attempt to rescue the mining sector from the
prolonged depression in the international price of copper which stemmed from the end of the 1970s.
ZCCM had, as main shareholders, the Zambian government (60,3%) and Anglo American
Corporation which controlled 27,3% of the interests. As stated by law, Anglo American had preemptive rights to purchase any shares sold by the government and it had an effective right of veto
over the sales of any major assets (Craig 2001). Besides mining exploration and exploitation, ZCCM
was deeply interlinked with the rest of the economy, through backward linkages with suppliers and
forward linkages with traders and manufacturers (Fraser and Lungu 2007). As expressed in Craig
(2001:x) “the strategic and symbolic significance of ZCCM was frequently expressed in terms such as ZCCM is
Zambia, Zambia is ZCCM”.
In Chile, the nationalisation experience was enacted in 1971, soon after the election of President
Allende, with the approval of law 17540 which stated that “...the foreign companies forming the great
mining are nationalized and incorporated to the full and exclusive dominion of the Nation…. 2 ” The new
regime decreed that the goods and facilities of the companies, at that time the US companies
Anaconda and Kennecott3, would become property of the State of Chile, and the operations would be
managed by collective societies coordinated by the State Copper Corporation (Cochilco 2007). The
government could dispose of the organization, exploitation and administration of the nationalized
companies (Ministero de Mineria 2007) and in April 1976 the government created a state-owned
mining company, Codelco (the Corporación Nacional del Cobre de Chile) in charge of administrating
the nationalized copper mines, also defined as Gran Mineria (Chuquicamata, El Salvador, Andina and
El Tenente).
The privatisation reforms
In the two countries the privatisation reforms occurred in very different periods
of time. In Zambia, the reform was introduced in the mid 1990s, as in many other
African countries where privatisation was considered to be the centre piece of the
structural adjustment programs (Appiah-Kubi 2001, Bennel 1997). In Chile the
reform was adopted in 1974 with the neoliberal reforms realised by the Pinochet
regime.
Zambia embraced privatisation of many state owned enterprises in an attempt to rescue itself
from a prolonged economic slowdown which had degenerated into a fiscal crisis. The reform was
backed by the Movement for Multiparty Democracy whose perception of the role of the public sector
was expressed in the following terms: “the government
2
3
From transitory disposition of the Article 10 of the Chilean Constitution.
For a full description of the copper industry in Chile in the 20th century until the 1970s see Gedick 1973.
restricts itself to rehabilitate and build economic infrastructure with a small public sector
in the midst of a basically private enterprise economy” (Andersson et al. 2000, 6).
Table 1
Copper mining companies in Zambia
Mines
Konkola
Copper Mines
(KCM)
Owner 2000
Anglo American Corporation (US)
65%, IFC (7.5%), CDC (7.5%), ZCCM
20%
Kansashi
Chambishi
Metals Plc
Chambishi
Mines Plc.
Mopani
Copper Mines,
Plc
Luanshya
Anglo-Vaal (South Africa)
Co.-Africa (China)
Glencore
International
AG,
Switzerland (73,1%), First Quantum
Minerals, Ltd, Canada (16,9%), ZCCM
(10%)
RAMCOZ Binani, India (85%),
ZCCM (15%)
Lumwara
Chibuluma
Mines
Source: AnMbendi 2006, Fraser and Lungu 2007
Owner 2006
Turnover[1]
in 2005
Vedanta Resources,
India (51%), Zambia
Copper
Investment
(28,4%), ZCCM (20,6%)
200,00
per year
First
Quantum
Minerals Ltd, Canada
145,000
t/per year
China Non-Ferrous
Metals
Corp
(85%),
ZCCM (15%)
140,000
t/per year
t/
Co.-Africa (China)
Glencore
International
AG,
Switzerland (73,1%), First
Quantum Minerals, Ltd,
Canada (16,9%), ZCCM
(10%)
J & W Holding AG,
Switzerland
(85%),
ZCCM (15%)
135,000
t/per year
50,000 t/per
year
Equinox Resources,
Australia (51%), Phelps
Dodge Corp US (49%)
25,000 t/per
year
Metorex Ltd, South
Africa
15,00 t/per
year
While the privatisation of major sectors of the economy was introduced in 1992, it was only in
1996 that the government implemented the reform for the copper industry, which is indicative of the
importance bestowed to the sector. The reform was deemed necessary to rescue the company from a
dramatic crisis which saw a loss equal to 1 million $ per day in 1998 (Andersson et al. 2000,
www.bbc.radio4). Between 1997 and 2000, ZCCM was split into seven different units and sold off.
The units were initially bought up by seven multinational mining companies, including AngloAmerican (AAC) which chose to exercise its per-emptive rights and took on 65% of Konkola Copper
Mines (KCM), the largest operating mine at that time. Yet, in 2002 AAC pulled out from Zambia
handing the mine back to the state, and in 2004 the mine was sold to Vedanta at a knockdown price.
The seven multinational companies in 2000 were Anglo-Vaal from South Africa, Binani from India,
Metorex South Africa, Glencore and First Quantum from Canada, International Financing
Corporation, Commonwealth Development Corporation.
As illustrated in the chart, at present the largest share in the Zambian copper industry is owned
by First Quantum, with other large corporations owning more than 15%, like Co-Africa from China,
Vedanta from India, which took over Anglo American in 2004, and Glencore.
Figure 2: ownership structure in Zambia 2006
E q u in ox
Z CCM - IH
J&W Hold in g
V ed an ta
G len core
F irst Q u an tu m
Co- Af rica
Source: AnMbendi 2006, Fraser and Lungu 2007
As stated in the Mine and Mineral Act adopted in 1995 the new companies would be registered in
Zambia and would be subject to the monitoring of an inter-ministerial group. The Government would
retain a share in each mine through direct ownership of ZCCM-International Holdings. However, so
far the Government of Zambia has not received any dividend from the company, despite the boom,
due to the accumulation of liabilities (Ministry of Finance). 4
The Mine and Mineral Act adopted in 1995 greatly simplified the licensing procedures, placing
minimum constraints on exploration and exploitation activities. It established a royalty calculated as
2% of the market value of minerals f.o.b., less the cost of smelting, refining and insurance, handling
and transport from the mining area (www.zambiamining.co.zm). According to the Act copper
exporters were levied 35% of taxable income whereas other mineral and non-traditional commodities
attract a levy of 15%. Despite what established in the Act, the rate negotiated by most mining
4
ZCCM-IH is a state-owned company; a joint venture 87% owned by the government and 13% in the hands of private
shareholders. It is listed in the LUSE and has a separate legal entity from the Government. Actually the Government owes
money to ZCCM.
companies was 0.6% of the gross revenue, as stated in the development agreements which were
secretly signed between the companies and the Government (Fraser Longu 2007). Also the export tax
was set at 25% instead of 35% and carrying forward losses was allowed for periods of between 15 and
20 years.5 The companies were also granted deductions of 100% of capital expenditure in the year in
which this incurred and were exempted from paying customs, excise duties or import tax levied on
machinery and equipment. The mining sector was authorised to claim back from the Zambian
Government all of the VAT paid on goods that it buys locally. The government undertook not to
amend any of these tax regimes after the agreement was s for as much as 20 years. It has been
estimated that in 2007 the Government would have received at least 50 millions US$ if the mines had
paid a 3% of Royalty.6 (from BBC)
In Chile, the privatisation reform was embraced in the 1970s after a long period
of debate and discussion which is indicative of the concerns regarding privatisation
of the mines. Differently from Zambia, the reform did not determine a large shift in
ownership to the private sector; on the contrary, a large share of copper production
was indeed retained by the government through Codelco. However, the new mining
code enacted in 1974 reset constitutional protection for the right of private
ownership of mines in terms of full exploration and exploitation, and granted equal
treatment of domestic and foreign companies, setting no limits on profits and capital
repatriation (Spilimbergo 1998, Ruiz-Dana 2007, Pawlett 1999). Despite these
concessions to the mining companies, very little foreign capital flew into the
industry during the 1980s, probably because of the risk associated with the military
regime and only with the return to democracy in the 1990s the share of foreign
companies in copper production (the so-called Mediana Mineria) increased
substantially, with an increase from 6% to 54% between 1980 and 1996 for the large
private mines (mediana mineria), whereas CODELCO shrank from 84% to 39%.
5
This indicates that losses made in year 1 of operations could be subtracted in subsequent years from taxable profits.
The development agreements also dispose that if the global copper price increases significantly
and exceeds (US$2700 per tonne) then the Government can actually claim back a percentage of each
sale made. However the impact of price participation clauses is minimal because the payment to the
government is again deductible by the companies for income tax purposes (Fraser and Lungu 2007).
6
Figure 3
6000
5000
4000
3000
2000
1000
Codelco + Enami
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
0
19
87
Thousands of Metric Tons
Public and private sector ownership
Private Companies
Source: Cochilco 2007
As illustrated in the chart below, the structure of ownership in Chile is characterised by a large
state ownership through Codelco which owns almost 40% of the mining production, while the rest is
owned by trans-national corporations.
Figure 4: ownership structure in Chile (2006)
others
Source: AnMbendi 2006, Cochilco Codelco
2007
Phelps Dodge
Rio Tinto
BHP
Source: AnMbendi 2006, Cochilco 2007
Falconbridge
Source: Cochilco 2007
Anglo
American
Table 2
Copper mining companies in Chile
Mines
Chuquicamata
Radomiro
Tomic
Division
Salvador
Division
El
Tenente
Division
Andina
Collahuasi
Mantos Blancos
Escondida
La Candalaria
Owner 2006
Codelco
Turnover
1987
502,9
Turnover
1996
632,3
Turnover
2006
634
Codelco
-
-
306
Codelco
97,1
89,9
80
Codelco
369
344,7
418
121,6
154,4
236
-
-
440
85,7
122,4
149,7
-
841,4
1255
-
136,8
169,6
Codelco
Anglo
American (US) 44%,
Falconbridge 44%,
Japanese
Consortium 12%
Anglo
American
(US)
100%
BHP
Billiton
Limited (Australia)
57.7%, Rio Tinto
(UK) 30%
Phelps Dodge
(US) 80%
Phelps Dodge
(US) 51%
El Abra
Pequena
Enami
Mineria7
Source: AnMbendi 2006, Cochilco 2007
218,6
114,1
128,3
107,3
Until 2006, the taxation system for the mining companies was regulated by the Decree Law 600
enacted in 1974, which establishes the foreign investment statute. The act grants all investors access to
the foreign exchange market, the right to return capital without taxation, a tax invariability for 10
years, in some cases extended to 20 if the capital is greater than 50 million US$.
As far as the taxes are concerned, in Chile profits earned from business are subject to the First
Category tax and to the Global Complementary tax (for local investors) or the Additional tax (for
foreign investors). The First Category tax has a 17% rate which is levied on profit received or accrued
7
The mining code of 1974 also contemplated the existence of small private owned mines
(Pequena Mineria), which produce 10% of the total copper and sell their output to the public
enterprise ENAMI (Spilimbergo 1998).
by the mining enterprise, while the Global Complementary and the Additional one, with rates from 0
to 40% and from 1.75% to 35%, respectively, are levied on the remittances of dividends and other
profits received by the shareholders or partners. When the base for the Global or Additional tax is
calculated the First Category tax is deducted. Companies benefit from deductions to apply when
calculating the First Category tax, related to organization and start up expenses, interest expenses,
technical assistance, tax losses and asset depreciation. 8
Since January 2006 the taxation system is regulated by the law 20.026 article 64bis which
establishes a specific tax on mining activities. The tax will be levied on the taxable operational income
of the mine operator in accordance with the following schedule:
Table 3
SALES (in MT)
TAX RATE
<12,000
no tax
12,000-15,000
0.5%
15,000-20,000
1.0%
20,000-25,000
1.5%
25,000-30,000
2.0%
30,000-35,000
2.5%
35,000-40,000
3.0%
40,000-50,000
4.5%
>50,000
5.0%
Source: www.cinver.cl/ (2007)
The reform also imposes a royalty equal to 2%. It appears that prior to the reform the actual
mining taxes paid by Codelco represent 28.7% of the final price while taxes paid by private mining
amounted to only 5.3%. This meant that while Codelco paid 10,659 millions US$ in the years 19902001, the private companies paid only 1,638 million US$ in spite of their product being 25% greater. It
is therefore estimated that the total of lost tax revenue during that period amounts t more than 10,000
million US$ (www.cinver.cl).
8 Tax losses if net operation losses exceed the tax payer’s undistributed or accumulated after tax
retained earnings, the excess can be used to offset the tax payer’s profits of the subsequent tax year.
Asset depreciation: a tax deduction is allowed for fixed asset depreciation, corresponding to the
annual installment of depreciation of movable and immovable property tax payers may opt for an
accelerated method of depreciation with respect to new fixed tangible assets when acquired locally or
new or used fixed tangible assets when imported.
Table 4
Mining taxation in Zambia and Chile
Zambia: the Mine and Mineral
Act (1995)
Royalty
Tax
Deduction
s
Tax losses
Carry-forward
Exemption
s
2.5%, but effective 0.6%
Tax on exports 35%
100% of capital expenditure
Losses made in year 1 can be
subtracted in subsequent years for 20
years
Chile: the Mining Code 1974
2%; specific mining tax since
2006*
Tax on profits 17%
Tax on dividends 35%, less
15% of tax on profits
From
tax
on
profits:
organization
and
start
up
expenses,
interest
expenses,
technical assistance
It applies indefinitely
customs or excise duties, import
tax on machinery and equipment
other
mechanisms
Asset depreciation
Source: Fraser and Lungu 2007, anMbendi 2006, Cochilco 2007
Given this combination of ownership and taxation our main question is on whether this has had
different implications on the way the boom has been managed as well as on its effects.
4 Fiscal responses to the copper boom
As far as fiscal policy is concerned, a largely privatised regime determines a reduction in export
receipts accruing to the public and, in turn, a low appropriation of commodity revenues may then
limit the scope for policy intervention during a boom, which we see identified as the possibility to
save the inflow in foreign assets and then spend it progressively according to the country’s
developmental needs and absorptive capacity.
In the case of Zambia and Chile, evidence illustrates how the amount of export receipts accruing
to the fiscal budget differs, as expected given the differences in the privatisation regime. During the
years of the boom the two economies experienced indeed an increase in fiscal revenues, in absolute
terms, excluded rents. Yet, while in Chile the timing of the increase coincides with the one of the
boom which indicates that export receipts may have positively contributed to the budget, in Zambia
the increase in government revenues seems to date from before the boom.
Looking at the origin of revenues in both countries the bulk of government revenues comes from
taxes. However, while in Chile the contribution from the copper sector has reached almost 30% of
taxes and 20% of total revenues in 2006, in Zambia the contribution of the mining sector to the total
revenues has been roughly of 10% in 2006, and almost non existent in the previous years. Thus, the
increase in government revenues in Zambia should be rather attributed to a general increase in taxes,
mainly VAT and income tax associated probably with the GDP growth experienced in those years. 9
(figure x).
Figure 5.a
Figure 5.b
Revenues in Chile (pesos)
Revenues in Zambia (in ZMK)
25000
20000
6000
Billions
Billions
8000
7000
5000
4000
3000
2000
15000
10000
5000
1000
0
0
2001
2002
2003
2004
2005
2006
2000
Mines taxes Revenues Taxes
2001
2002
Codelco's contribution
2003
Revenues
2004
2005
2006
Taxes
*mining taxes in Zambia do not include PAYE for workers
Source: WB-WDI, Zambian Revenue Authority
Figure 6
Kwacha
Billions
Tax payed by mining companies (Kwacha)
1,000
800
600
400
200
0
2001
2002
2003
2004
Compay Tax Withholding Tax PAYE
2005
2006
2007
Mineral Royalty
Source: Zambian Revenue Authority
9
The hypothesis is also advanced by Cali and Te Welde (2007) who indicate how the increase in government revenues in
Zambia has to be traced in the improvement in the tax collection procedure
Another interesting information which is consistent with the taxation system in Zambia, is that
the most relevant contribution to the Zambian budget coming from the mining companies is in the
form of taxes paid for the workers (PAYE), and not from royalties or any other form of tax; while the
rate of company tax has been increasing in the years of the boom 10.
An additional element to be considered is that, although revenues have increased in both
economies, in Zambia revenues as a percentage of GDP have not increased. As illustrated in the
graph below revenues as a share of GDP in the country have sharply declined since 2001 and
fluctuated without any rising trend in the years of the boom. This is quite indicative of the fact that
GDP growth in Zambia, mainly driven by the copper boom, has contributed to an expansion of
government revenues. On the contrary, in Chile revenues as a share of GDP have increased,
indicating that the budget has been benefiting from the country’s economic growth more than
proportionately.
Figure 7.a Revenues in Chile
Figure 7.b: Revenues in Zambia
25000
Revenues as % of GDP in Zambia
30
25
20
20000
15000
15
10
5
0
10000
5000
0
20
20
19
19
18
18
17
17
16
2000 2001 2002 2003 2004 2005 2006
Revenues
Revenues (%GDP)
8000
7000
6000
5000
4000
3000
2000
1000
0
Billions of Kwacha
Billions of pesos
Revenues as % GDP in Chile
2001 2002 2003 2004 2005 2006
Revenues as % of GDP
Revenues
Source: World Bank- World Development Indicators
In considering the fiscal response to a commodity boom, one should look first at the amount of
export receipts appropriated by the government and then examine how these receipts have been used.
Probably, the most relevant information is on whether revenues have been saved or spent soon
10
This datum is confirmed also by Fraser and Longu (2007).
afterwards, since 2 this has implications on the way the boom can be stretched in the future without
incurring into Dutch disease kind of effects.
When very little accrues to the government, then fiscal policy will be conducted according to the
ordinary budget management. However, given that in Zambia revenues have increased in absolute
terms, though not because of the boom, it may be interesting to understand how the government has
responded to this increase. This is because an increase or reduction in government spending during a
commodity boom can still amplify or mitigate the effects on aggregate demand and domestic
currency. As illustrated from the graph below the spending response in Zambia has been clearly of
increasing expenditure and registering budget deficits for al the years of the boom. On the contrary
Chilean fiscal policy has been rather cautious and the economy has been registering consistent fiscal
surpluses since 2003.
Figure 8.a
Figure 8.b
Chilean budget
Zambian budget
30
25
25
20
20
15
15
10
10
5
5
0
0
1998
1999
2000
2001
Expenditures (% of GDP)
2002
2003
2004
2005
2006
Revenues excl. grants (% of GDP)
2000
2001
2002
Expenditures (% of GDP)
2003
2004
2005
2006
Revenues excl. grants (% of GDP)
Note: due to data availability the two graphs have different starting dates
Source: WB-WDI
As illustrate in the following graph, patterns of government spending in Chile have been rather
constant throughout the years, whereas the increase in spending in Zambia is also associated with a
change in the composition of government expenditure with an increase in spending in goods and
services and a reduction in employee compensation. 11 The shift towards spending in goods and
11
The datum on grants refers to the grants conceded through the budget support which accrue directly to the budget and then
through this are transferred to the different ministries and sectors of the economy.
services may partly explain the increase in infrastructure and construction experienced by the
economy.
Figure 9.a Zambia expenditure
Figure 9.b Chile expenditure
Expenditure composition
Government Expenditure Composition
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
2001 2002 2003
Interests
Grants
Other
compensation of employees
2004 2005 2006 2007
Subsidises
Social benefits
Use of goods and services
Interest
Subsidies
2000 2001 2002 2003 2004 2005
Grants
Social benefits
Other
Goods and Services
Compensation of employees
2006
Source: WB-WDI
The prudent fiscal policy in Chile is regulated by the structural budget rule enacted in 2000.
According to this rule, every year a structural government income is calculated on the basis of the
medium term price of copper and the economy’s output gap. Fiscal expenditure is then set in a way
that structural revenue minus fiscal expenditure is equal to 1% of GDP (since 2007 this has been
lowered to 0.5%), so as to maintain a surplus12. Since 2006 part of this surplus, a maximum of 0.5% of
GDP, is channelled to the Pension Reserve Fund and the remaining part net of capital contributions to
the central bank is channelled to the Economic and Social Stabilisation Fund. The two funds are
sovereign wealth fund, with assets wholly invested abroad. The funds are managed by the central
which can then recapitalise the assets every five years (Ministry of Finance 2007, Pedersen 2008). The
rule has valid countercyclical properties since it allows for higher conventional surpluses during
expansions and it registers lower surpluses or moderate deficits during recessions. Also it provides a
sort of fiscal anchor for economic agents. As expressed in Marcel et al. (2001:3) “…considering the
indicator’s public nature and wide broadcast, this rule provides an anchor of credibility on fiscal
policy which means that the economic agents will know how fiscal policy will react when changes in
the macroeconomic environment occur.
Marcel et al. (2001) and Pedersen (2008) illustrate the rule as follows.
Bst = Bt – Tt + [Tt (Yt*/Yt)E] – Ct + Cst; where Bst is the structural balance, Bt is the actual balance, Tt are the net tax revenues, Tt
(Yt*/Yt)E is the actual tax revenue with Yt* as the potential output and E the output elasticity of tax revenues, Ct are the
taxes from Codelco at time t, and Cst are the taxes from Codelco under a medium term level of the copper price.
12
As indicated, while the boom has probably positively contributed to both countries’ GDP, only in
Chile this has lead to a substantial increase in government revenues, since Zambia revenues in
relative terms have not increased. Revenues in Zambia do increase in absolute terms, but there is not
enough evidence that this increase is originated from the copper boom. As far as expenditure is
concerned, the fiscal choice has been to save and accumulate surplus in Chile, as regulated by the
structural budget rule; whereas, in Zambia the government has spent the additional revenues, mainly
into the provision of goods and services.
5 Monetary responses to the copper boom
A specific kind of privatisation regime may influence the impact a commodity boom has on the
currency and relative prices not only through fiscal responses, namely through the option to spend
the inflow as opposed to save, but also through a complication of foreign exchange management. In
this last case the problem is identified by the fact that foreign exchange accrues directly to the market
and any accumulation of reserves by the central bank can be done only through foreign exchange
interventions which need to be sterilised.
To understand how and to what extent the privatisation regime may indirectly impact on
monetary policy responses we shall look here at the effect of the boom on the domestic currency,
since prices of tradable and non tradable goods and services are not similarly available. For this
analysis one should bear in mind that clearly monetary and exchange rate responses do depend on
the kind of exchange rate regime. Notwithstanding the differences in the commodity industry and in
the fiscal responses, the monetary frameworks adopted in the two countries are relatively similar.
Both the fully fledged inflation targeting in Chile and the monetary targeting in Zambia maintain
price stability as the primary objective for monetary policy. De iure the two countries have adopted
floating exchange rate regimes, which postulate no foreign exchange intervention to determine the
trend of the exchange rate, no “leaning against the wind”. Accordingly, in Chile very little
intervention is usually conducted by the central bank (see De Gregorio and Tokman 2004). In Zambia
as seen before the foreign exchange interventions conducted during the boom where not so
substantial to offset the appreciating trend of the currency. All in all, then we consider that the two
countries conducted no relevant interventions in the foreign exchange market in the years of the
boom, implying the currency has been mainly market determined.
Despite these similarities, the impact of the boom on the domestic currency has been rather
different, indicating that the combination of inflation stabilising policies with different degrees of
private ownership may engender opposite effects.
Figure 10.a
Figure 10.b
Nominal exchange rate for Zambia
Nominal exchange for Chile
1200
6000
1000
4000
800
CLP
2000
600
400
200
ZKw to SDR
ZKw to US$
CLP to SDR
2008m07
2008m01
2007m07
2007m01
2006m07
2006m01
2005m07
2005m01
2004m07
2004m01
2003m07
2003m01
2002m07
2002m01
2001m07
2001m01
0
2000m07
2008m07
2008m01
2007m07
2007m01
2006m07
2006m01
2005m07
2005m01
2004m07
2004m01
2003m07
2003m01
2002m07
2002m01
2001m07
2001m01
2000m07
2000m01
0
2000m01
ZKw
8000
CLP to US$
At a first glance, the extent and duration of the exchange rate appreciation in the two economies
are very different. The graphs in figure x illustrate how the Zambian Kwacha sharply appreciated at
the end of 2005 and after a depreciation it appreciated again from the end 2006 to beginning 2008. The
magnitude of the appreciation appears to be more intense if we account for the value of the currency
with respect to the Special drawing Rights, as opposed to the US$. On the contrary, the Chilean peso
has indeed steadily appreciated since 2003, but while the appreciation has continued up to 2008 if we
consider pesos to US$, the currency with respect to the Special Drawing Rights has remained
relatively stable, at least since 2005. Thus, it seems that the US$ depreciation may somehow account
for the peso appreciation starting from 2005.
Also, when considering the effective exchange rate, thus taking into account the trading partners,
the distinction in the two currencies’ behaviour is even more striking. As illustrated in the graph
below, while the Zambian nominal effective rate has appreciated sharply mainly in two different
occasions, at the end of 2005 and end of 2007, in Chile the currency has been rather stable with respect
to the other trading partners in nominal terms. 13
13
Chilean trading partners are US, Japan, China, South Korea and the UK. In Zambia these are Switzerland, the EU, the UK,
China and the US.
Figure 11.a
Figure 11.b
Bilateral exchange rates (2000-2007)
Nominal effective exchange rate
5000
4000
3000
2000
1000
20
0
20 0m0
0
1
20 0m0
0
7
20 1m0
01 1
m
20
0 07
20 2m0
0
1
20 2m0
03 7
20 m0
0
1
20 3m0
0
7
20 4m0
04 1
20 m0
0
7
20 5m0
0
1
20 5m0
06 7
20 m0
0
1
20 6m0
0
7
20 7m0
07 1
20 m0
08 7
m0
1
0
NER Zambia left-scale
NER Chile right-scale
160
140
120
100
80
60
40
20
0
20
00
20 m01
00
20 m08
01
20 m03
01
20 m10
02
20 m05
02
20 m12
03
20 m07
04
20 m02
04
20 m09
05
20 m04
05
20 m11
06
20 m06
07
20 m01
07
20 m08
08
20 m03
08
m1
0
800
700
600
500
400
300
200
100
0
Pesos to US$
Kwacha to US$
6000
Chile
Zambia
Source: IMF-IFS
The behaviour of the effective exchange rate provides a measure of one country’s competitiveness
with respect to the trading partners, which clearly appears to have deteriorated in the case of Zambia.
The limited appreciation of the Chilean peso indicates how the economy has managed to shield
from the shock, and has been able to mitigate the pressure on domestic prices and on the currency.
According to Corbo and De Gregorio (2007), the reasons for such behaviour in the exchange rate can
be explained by the low pass-through of the exchange rate to domestic prices and the existence of the
sovereign wealth funds. The authors illustrate how the low pass-through from exchange rate to prices
is mainly a result of the fact that locally produced goods are invoiced in local currency and not in
foreign currency which buffers these productions from the currency risk. Then, clearly the possibility
to save the inflow into funds abroad has mitigated the pressure on the currency since the foreign
exchange is largely kept abroad.
On the contrary in Zambia, the performance of the Zambian Kwacha indicates how the absence of
a stabilisation fund together with a higher degree of pass-through has contributed to a currency
appreciation. In Zambia, as we shall see, the pass-through is believed to be relatively high and some
local productions even if they are directed for the local market are priced in dollars. Had foreign
exchange flown into a separate fund the pressure on the exchange rate would have been much less,
and the Bank could have directly accumulated reserves without the need to issue money base as the
counterpart.
6 Conclusion
This paper intends to develop an aspect of the analytical framework for commodity booms. In
line with the literature of commodity booms the paper examines to what extent private ownership of
mines may matter for the effects a commodity shock has on the economy. Yet, this analysis goes
beyond the framework provided by the literature since it also considers the implications for fiscal and
monetary policy.
In support of the hypothesis that a large private ownership of the mining sector with a little
degree of taxation may complicate the management of a boom and exacerbate its effects, we compare
fiscal and monetary responses in Chile and Zambia. Yet, we assume that these fiscal and monetary
responses are largely defined by the ownership structure of the copper mines, which in the two
countries is substantially different.
The comparison first illustrates how the combination of large trans-national corporations in the
Zambian copper sector and the loose taxation conceded to them has limited the amount of resources
that accrued to the government from the boom. On the contrary the share of revenues from mines in
Chile has been much larger and it appears to have contributed substantially to an increase in
government revenues both in absolute terms and as a share of GDP.
Secondly, the fiscal response to the boom in Chile has been cautiously regulated by the structural
budget rule according to which the bulk of the inflow has been saved in sovereign wealth funds. In
Zambia fiscal policy has indeed been pro-cyclical, as long as revenues net of grants are considered,
and spending has been channelled to goods and services which may have further exacerbated the
appreciation of the currency.
Thirdly, as far as the monetary response is concerned, little needs to be say with respect to Chile.
This is because due to the cautions saving behaviour the impact on the currency has been limited,
thus it has posed no challenges to the inflation targeting regime and consistently with the framework
no foreign exchange intervention has been conducted. As for Zambia the situation is very different,
since the currency has appreciated due to the spending of the inflow, and this has posed the central
bank to a difficult situation since to avoid the appreciation it should have breached the monetary
framework.
All in all, the impact on the currency seems to suggest that given the same exchange rate
arrangement, economic outcomes on the currency may substantially differ according to the kind of
privatisation regime. However, with this argument we are far from concluding that public
management is superior to private management as such, since we believe that in the choice between
private and public management one should take into considerations additional issues, like efficiency
and the history of ZCCM in the 1980s provides a valid example for this. On the contrary, we intend to
emphasise the importance of saving of the export receipts, which is really what made the difference
between the Chilean and the Zambian boom. Although the issue is in line with the policy
recommendation proposed by the commodity boom literature, it is at odds with what maintained by
the absorption-spending literature and also by the more recent studies on commodity booms (Collier
and Venables 2008).
To this end, we question whether the private sector, especially trans-national corporations, would
be as prone to save as the public sector, and we doubt whether their savings instead of being
repatriated could be as easily used in funds for the future development of the economy. Thus, what
we question is more the possibility and willingness to save of the private sector, and also if they save.
Thus, we maintain that inasmuch saving is the appropriate response to a commodity boom then the
possibility and willingness to save tend to be higher in the public sector, rather than in the private one,
especially if foreign owned.
Finally, the paper highlights a theoretical point in addition to the one on the relevance of the kind
of ownership for the analysis of a commodity boom. This refers to the interconnection between fiscal
and monetary response, since different fiscal settings may have different impacts on the economy and
may require two distinct managements of the exchange rate. Therefore, we believe that in a
commodity dependence-context the choice of an exchange rate regime has to be done in accordance
with the kind of fiscal settings and regulation with an eye on the commodity sector ownership.
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