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Working Paper No 2009/13
APRIL 2009
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 exchange rate policy is limited. 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, 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.
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1
1. Introduction
A framework for the analysis of commodity booms in an era of highly liberalised economies
should take into consideration the nature of the ownership and management of the commodity
industry. In this paper, we will refer to ownership not as merely the degree of privatisation of the
industry, but also as the kind of taxation system, for even the latter provides a measure of the sector’s
integration in the rest of the economy. This is because, according to whether the privatised
commodity sector is highly or little taxed, the repercussions on the economy are different.
The distinction between kinds of ownership and taxation regimes bears its relevance for the way a
boom affects the economy, since spending and saving responses may differ according to whom
precisely gets the inflow.1 This is also the case when the foreign private sector is considered. This
study maintains that the presence of largely privatised commodity industries matters not only for the
effects on spending and saving behaviour, but also for the scope of macroeconomic management.
For a better understanding of the implications that different kinds of ownership have during a
commodity boom, this study compares the experiences of Chile and Zambia. In the two countries, the
type of mine 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 ways the copper boom has influenced the economy. As we shall see, the argument appears
supported by the fact that the exchange rate regime is approximately the same in both economies,
with very little intervention conducted by Bank of Zambia, and even less by Banco Central de Chile.
This similarity in the arrangement rules out, then, that the different outcome is owing to the kind of
exchange rate regime.
The structure of the paper is as follows. Section 2 provides the analytical framework of the paper
and reviews issues surrounding privatisation of state-owned enterprises 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 3 provides the contextual framework for the paper and
illustrates the privatisation reforms and taxation regimes in the two countries. In section 4, we
compare the fiscal responses to the boom, and in section 5 the exchange rate ones. Section 6 concludes.
1
See also the literature on commodity booms edited by Collier and Gunning (1999).
2
2. Privatisation reforms and macroeconomic policy
In its broadest 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
(Adam et al. 1982, Pinheiro and Schneider 1995.). On the one hand is the need to enhance efficiency in
obsolete public companies while promoting the participation of the private sector. On the other hand
is the rationalisation 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 and Schneider 1995, Buchs 2003, KayizziMugerwa 2002, and Adam et al. 1992).2 Empirically, the success of privatisation, both in terms of
efficiency and of revenues, is not clear (Bhoubakhri and Cossett 1999, Buchs 2003), probably because
privatisation has been embraced within a set of other economic reforms and 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 the sector into the country’s economy.
One of the main assumptions of this study is that the combination of a mild taxation regime and
highly privatised commodity industry may limit the scope for macroeconomic management during a
commodity boom and this occurs mainly in two ways.
2
Besides these general theoretical issues, literature on privatisation has been also sensitive to the effects on the
development of the capital market (Bhoubakhri 1999) or to the implications for the labour market, which usually constitutes the
main deterrent to the policy.
3
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 et al. 2001, Barnett 2000, Mansoor 1987). Whether a
larger private ownership results in an increase in the fiscal revenues or not depends on the totality of
these changes. Generally, the privatisation of the resource industry has occurred at times of low
commodity prices, when then the bargaining power of the government was very low. This led to a
negotiation of taxation regime very favourable for the mining companies, especially in Sub-Saharan
Africa (Nissanke 2008).
When a commodity boom strikes the economy, the presence of a large and little taxed privatised
industry may have additional implications on fiscal policy. Limiting the amount of export receipts
accruing to the government, it limits the government’s possibility to save the inflow and use it to
allocate resources to key sectors of the economy. As mentioned in the literature on commodity booms
(Collier and Gunning 1999, Hill 1991), the best response to a shock is to stretch investments until the
boom is over, which is usually done through saving in foreign assets. The measure also mitigates the
impact on the currency. Yet, when the private sector is local, its ability to save in foreign assets may
be leveraged by its low credit rating. On the other hand, when the private sector is foreign, it may opt
to repatriate profits and little would accrue to the economy as a whole. From this, our implicit
conclusion is that, where as saving is the most appropriate response, then a largely privatised regime
may limit this option.
In principle, whenever the role of fiscal policy during a boom is small, the government can at
least rely on exchange rate policy to offset the adverse consequences of the shock. For instance, it can
accumulate foreign exchange to avoid a nominal appreciation. However, the impact of accumulation
of foreign exchange is different under private and public ownership of the commodity sector. While
the issue on the implications on fiscal policy has been widely looked at, there has not been such a
broad examination of the implications of a largely private mining industry on the exchange rate
management.
The second implication of a largely privatised commodity sector is that it poses constraints on
exchange rate policy. 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.3
Conversely, when the inflow accrues to the private sector, if the central bank intends to curb the
appreciation, it needs to conduct foreign exchange interventions, and this has a cost. Foreign
exchange purchases entail issuance of the money supply as a counterpart. While advanced economies
3
On the Dutch disease see Corden 1984, Corden and Neary 1982 and Van Wijnbergen 1984.
4
can easily contain the increase in the money supply resulting from purchases of foreign exchange,
developing countries cannot. These economies generally sterilise the money supply through the issue
of treasury bills or central bank bonds. Given the shallowness of the financial system, characterised by
a very small corporate bond market, any change in the amount of treasury bills and bonds
undertaken by the government or the central bank greatly affects the capital market. Hence, the issue
of treasury bills to mop up liquidity may dramatically increase the interest rate, and, if the country
has a large domestic debt, interest payments will become unsustainable. When purchases of foreign
exchange cannot be easily sterilised, they will induce an increase in the money supply, which may be
inflationary. Thus, a large private ownership of mines may be of hindrance to 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 histories of Chile and Zambia have been long dominated by the
countries’ production and export of copper. Both economies are still heavily dependent on copper,
which constitutes 40% of total exports in Chile, and more than 70% of total exports in Zambia (IMFDTS).
Figure 1: GDP, exports and copper price cycle in Zambia and Chile
Chile: GDP, exports & copper price (1970-2005)
250
150
100
50
0
Exports (constant 2000 US$)
GDP (constant 2000 US$)
Copper price (right scale)
Millions
200
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
250
200
150
100
50
0
19
70
19
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19
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19
7
19 6
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19
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19
82
19
8
19 4
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19
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19
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19
9
19 4
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19
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00
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0
20 2
04
4500
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3500
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0
19
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19 0
7
19 2
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19 4
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19 6
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19 8
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19 6
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19 8
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19 0
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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
As a capital-intensive sector, the mining industry employs only 1% of total employment in Chile
and around 10% of the Zambian workforce.
5
The history of the copper sector in the two economies moves along similar tracks during the 1960s
and early 1970s. They both nationalised the copper industry, which was at that time in the hands of
multinational corporations. However, the kind of management and patterns of ownership
significantly diverge in the following decades. At present, the ownership structure in the two
economies 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 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 dated 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 pre-emptive 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 (2001:390) “the strategic
and symbolic significance of ZCCM was frequently expressed in terms such as ZCCM is Zambia, Zambia is
ZCCM”.
In Chile, the nationalisation legislation was enacted in 1971, soon after the election of President
Allende, with the passing of law 17540, which stated “...the foreign companies forming the great mining
are nationalised and incorporated to the full and exclusive dominion of the Nation….”4. The new regime
decreed that the goods and facilities of the companies, at that time the US companies Anaconda and
Kennecott5, 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, these being defined as Gran Mineria (Chuquicamata, El Salvador, Andina
and El Tenente).
4
5
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 Gedicks 1973.
6
The privatisation reforms
In the two countries the privatisation reforms occurred in very different periods. 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 at the onset of the Pinochet regime.
Zambia embraced privatisation of 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 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).
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 ZCCM 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 finally 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 (see table 1 and figure 2).
7
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
Anglo-Vaal (South Africa)
Chambishi
Mines Plc.
Co.-Africa (China)
Mopani Copper
Mines, Plc
Glencore International AG,
Switzerland (73,1%), First Quantum
Minerals, Ltd, Canada (16,9%), ZCCM
(10%)
Luanshya
RAMCOZ Binani, India (85%), ZCCM
(15%)
Lumwara
Owner 2006
Turnover 2006
Vedanta
Resources,
India (51%), Zambia
Copper
Investment
(28,4%), ZCCM (20,6%)
200,000t per year
First Quantum
Minerals Ltd, Canada
145,000t per year
China Non-Ferrous
Metals Corp (85%),
ZCCM (15%)
Co.-Africa (China)
Glencore International
AG, Switzerland (73,1%),
First Quantum Minerals,
Ltd, Canada (16,9%),
ZCCM (10%)
140,000t per year
NA
135,000t per year
J & W Holding AG,
Switzerland (85%),
ZCCM (15%)
50,000t per year
Equinox Resources,
Australia (51%), Phelps
Dodge Corp US (49%)
25,000t per year
Metorex Ltd, South
Africa
15,000t per year
Chibuluma
Mines
Source: AnMbendi 2007, Fraser and Lungu 2007
As illustrated in figure 2, at present (2007) the largest share in the Zambian copper industry is
owned by First Quantum, with the other large corporations owning more than 15%, like Co-Africa
from China, Vedanta from India and Glencore from Switzerland.
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
retains 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 liabilities they had accumulated in the previous years. 6
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-IH (from interview to Ministry of Finance).
6
8
Figure 2: ownership structure in Zambia 2007
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 2007, Fraser and Lungu 2007
The Mine and Mineral Act greatly simplified the licensing procedures, placing minimal
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 the terms of the Act, the rate negotiated by most mining companies was 0.6% of
the gross revenue, as stated in the development agreements, secretly signed between the companies
and the Government (Fraser and Longu 2007). In addition, the export tax was set at 25% instead of
35% and carrying forward losses was allowed for periods of between 15 and 20 years. 7 The Act also
granted to the companies deductions of 100% of capital expenditure in the year in which this incurred
and it granted exemptions 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 signed for as long 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 8
(from www.bbc.radio4).
In Chile, the privatisation reform was embraced in the 1970s after a long period of debate and
discussion, given the concerns on the privatisation of the mines. In contrast to that in Zambia, the
7
This indicates that the companies can subtract from taxable profits losses made in year 1 of operations in subsequent years.
8
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 this price
participation clauses has been minimal because the payment to the government is again deductible by the companies for
income tax purposes (Fraser and Lungu 2007).
9
reform did not lead to 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.
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
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 it
was only with the return to democracy in the 1990s that the share of foreign companies in copper
production (the so-called Mediana Mineria) increased substantially, from 6% in 1980 to 54% in 1996,
whereas CODELCO shrank from 84% to 39% in the same years (figure 3).
Figure 3: public and private ownership in Chile (1987-2007)
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
Figure 4: ownership structure in Chile (2006)
others
Phelps Dodge
Codelco
Rio Tinto
BHP
Falconbridge
Source: AnMbendi 2006, Cochilco 2007
10
Anglo
American
As illustrated in figure 4 and table 2, 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.
Table 2: copper mining companies in Chile
Mines
Owner 2006
Turnover 1987
Turnover 1996
Chuquicamata
Radomiro Tomic
Turnover 2006
Codelco
502,9
632,3
634
Codelco
-
-
306
Division Salvador
Codelco
97,1
89,9
80
Division El Tenente
Codelco
369
344,7
418
Codelco
Division Andina
121,6
154,4
236
Collahuasi
Anglo American 44%,
Falconbridge
44%,
Japanese Consortium 12%
-
-
440
Mantos Blancos
Anglo American 100%
85,7
122,4
149,7
Escondida
BHP
Billiton
Limited
(Australia) 57.7%, Rio
Tinto (UK) 30%
-
841,4
1255
La Candalaria
Phelps Dodge (US) 80%
-
136,8
169,6
El Abra
Phelps Dodge (US) 51%
Pequena Mineria9
Enami
218,6
114,1
128,3
107,3
Source: AnMbendi 2007, Cochilco 2007
Until 2006, the taxation system for the mining companies was regulated by the Decree Law 600
enacted in 1974, which established the foreign investment statute. The act granted 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
by the mining enterprise, while the Global Complementary and the Additional taxes, 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
9 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).
11
calculating the First Category tax, related to organization and start up expenses, interest expenses,
technical assistance, tax losses and asset depreciation. 10
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: taxes on mining activities in Chile
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% higher. It
is, therefore, estimated that the total of lost tax revenue during that period amounts to more than
10,000 million US$ (www.cinver.cl).
10 Tax losses definition: if net operation losses exceed the taxpayer’s undistributed or accumulated
after tax-retained earnings, the excess can be used to offset the taxpayer’s profits of the subsequent tax
year. Asset depreciation definition: a tax deduction is allowed for fixed asset depreciation,
corresponding to the annual instalment 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.
12
Table 4: Mining taxation in Zambia and Chile
Zambia: Mine and Mineral Act (1995)
Royalty
2.5%, but effective 0.6%
Chile: Mining Code (1974)
2%; specific mining tax since 2006*
Tax on profits 17%
Tax
Deductions
Tax
losses
Carry-forward
Exemptions
Tax on exports 35%, but effective 25%
100% of capital expenditure
Losses made in year 1 can be subtracted
in subsequent years for 15 - 20 years
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
As shown, the degree of integration of the commodity sector in the two economies is quite
different. This distinction partly explains why the outcome of the boom in Zambia and in Chile has
differed.
4. Fiscal responses to the copper boom
As far as fiscal policy is concerned, a largely privatised regime results in a reduction in export
receipts accruing to the public sector. In turn, the low appropriation of commodity revenues may then
limit the scope for policy intervention during a boom.
In the case of Zambia and Chile, the evidence illustrates how the sum of export receipts accruing
to the fiscal budget differs, as expected, given the differences in the privatisation regimes. During the
years of the boom, the two economies indeed experienced an increase in fiscal revenues, in absolute
terms, excluding rents. Yet, while in Chile the timing of the increase coincides with the one of the
boom indicating that export receipts may have positively contributed to the budget, in Zambia the
increase in government revenues seems to date from the years before the boom.
Looking at the origin of revenues, in both countries the bulk of government revenues come 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. From this
13
evidence, one can infer that the increase in government revenues in Zambia is mainly due to a general
increase in taxes, such as VAT and income tax, probably associated with an improvement in tax
collection procedure (Cali and Te Velde 2007) (figure 5).
Figure 5: Revenues excluded grants
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: Zambian taxes
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
An interesting point, regarding Zambia, is that the highest contribution to the Zambian budget
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.11
11
Fraser and Longu (2007) confirm this datum.
14
An additional element to consider is that, although revenues have increased in both economies, in
Zambia revenues as a percentage of GDP have not increased. As illustrated in figure 7, 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 indicative of the fact that GDP growth in Zambia, mainly driven by
the copper boom, has not contributed to an expansion of government revenues. On the other hand, 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: Revenues in local currency and as % of GDP
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 whether revenues have been saved or spent, since
this has implications on the way the boom can be continued into the future without incurring 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 first graph in figure 8, the spending response in Zambia has been
clearly to increase expenditure registering budget deficits for al the years of the boom. On the other
15
hand Chilean fiscal policy has been rather cautious and the economy has been registering consistent
fiscal surpluses since 2003.
Figure 8: Spending and saving behaviour
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
The prudent fiscal policy in Chile is regulated by the structural budget rule enacted in 2000.
According to the rule, every year a structural government income is calculated based on the medium
term price of copper and the economy’s output gap. Fiscal expenditure is the, set so that structural
revenue minus fiscal expenditure is equal to 1% of GDP (since 2007 this has been lowered to 0.5%), 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 funds,
with assets wholly invested abroad. The funds are managed by the central bank that 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. In addition, 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
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
16
means that the economic agents will know how fiscal policy will react when changes in the
macroeconomic environment occur”.
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 originates 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, it appears that the government has spent the additional
revenues.
5. Exchange rate policy 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, i.e. through the option to spend the
inflow as opposed to save, but also through 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 affect exchange
rate policy responses we look here at the effect of the boom on the domestic currency. For this
analysis, one should bear in mind that clearly exchange rate responses depend on the kind of
exchange rate regime. Notwithstanding the differences in the commodity industry, and in the fiscal
responses, the regimes adopted in the two countries are relatively similar. They have a de jure floating
exchange rate with a fully-fledged inflation targeting in Chile and a monetary targeting in Zambia.
Both monetary frameworks maintain price stability as the primary objective for monetary policy, and
postulate no foreign exchange intervention to determine the trend of the exchange rate, no “leaning
against the wind”. Although Bank of Zambia tends to conduct foreign exchange intervention,
evidence illustrates (see Weeks et al. 2007) that in the years of the boom this management has been
negligible. All in all, 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.
17
Figure 9: The Zambian Kwacha and Chilean Peso.
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$
Source: IFS-IMF
At a first glance, the extent and duration of the exchange rate appreciation in the two economies
are quite different. The graphs in figure 9 illustrate how the Zambian Kwacha sharply appreciated at
the end of 2005 and, after a depreciation, it appreciated again from the end of 2006 to the beginning of
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$. On the other hand, the
Chilean peso has indeed steadily appreciated since 2003, but while the appreciation has continued up
to 2008 if we consider pesos to US$, 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’s appreciation starting from 2005.
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
(figure 10), while the Zambian nominal effective rate has appreciated sharply mainly on 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,13 appreciating only slightly between 2003 and 2005 and at the end of
2007.
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.
13
18
Figure 10: Nominal and real effective exchange rates14
Real effective exchange rate
Nominal effective exchange rate
200
160
140
120
100
80
60
40
20
0
180
160
140
120
100
80
60
Chile
Zambia
20
Zambia
2007m12
2007m07
2007m02
2006m09
2006m04
2005m11
2005m06
2005m01
2004m08
2004m03
2003m10
2003m05
2002m12
2002m07
2002m02
2001m09
2001m04
2000m11
2000m06
0
2000m01
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
40
Chile
Source: IMF-IFS
As far as the real effective exchange rate is concerned, this is calculated as a traded average of the
currencies of the countries’ trading partners each deflated by the partner’s CPI. The second graph in
figure 10 shows a very sharp appreciation and subsequent depreciation for the Zambian rate, while
the Chilean rate appears to be more stable with a slight appreciation from 2003 to 2005 and then
depreciation up to 2007.
The limited volatility of the Chilean peso suggests that the economy has been shielded from the
price shock, and has been able to mitigate the pressure on domestic prices and on the currency.
According to De Mello (2008), 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 by the existence of the sovereign
wealth funds. The author illustrates 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 products from currency risk. Then, clearly, the ability to save the inflow
into funds abroad has mitigated the pressure on the currency since the foreign exchange is largely
kept abroad.
On the other hand, 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 large
fluctuations in the currency and a dramatic appreciation in 2003-2005. 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.
14
Contrary to bilateral rates, the effective rates appreciate when the value increases and vice versa.
19
6. Conclusion
This paper analyses to what extent private ownership of mines may matter for the affects a
commodity shock has on the economy, looking at fiscal and exchange rate policy responses.
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 exacerbating its effects, we compare
the responses in Chile and Zambia, which have very different ownership structures.
The comparison first illustrates how the combination of large trans-national corporations in the
Zambian copper sector and the mild taxation demanded of them has limited the resources that
accrued to the government from the boom. On the other hand, 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 under 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. Thirdly, as
far as the exchange rate policy response is concerned, little can be said with respect to Chile. This is
because due to the cautions saving behaviour, the impact on the currency has been limited, so no
major challenges have faced 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 fluctuated quite substantially, which has posed the central bank to a difficult
situation, since, to avoid to mitigate the volatility it would have breached the monetary framework.
Overall, the impact on the currency seems to suggest that given the same exchange rate
arrangement, economic outcomes on the currency may substantially differ owing 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
20
the
Chilean
and
the
Zambian
boom.
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Websites:
www.ambendi.com
www.bbc-radio4.co.uk
www.zambiamining.com
www.cinver.cl
23