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PRIVATIZATION AND LIBERALIZATION OF THE EXTRACTIVE SECTOR IN ZAMBIA - IMPLICATIONS FOR THE RESOURCE CURSE Mineworkers at a copper mine in Chambishi, Zambia. Credit: Christian Aid/David Rose Master thesis, Aarhus University, Department of Political Science Author: Christian Hallum Student number: 20041854 Thesis supervisor: Anne Mette Kjær Number of words: 35.877

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Master thesis - Christian Hallum - Aarhus UniversityABSTRACTThe thesis seeks to analyze what the effects of privatization and liberalization are on the occurrence and political dynamic of the resource curse phenomenon in developing countries. This is deemed highly relevant as the existing literature has not paid much attention to this issue despite the fact that many resource-rich developing countries have liberalized and privatized their extractive sector in recent years. Through an analysis of two separate boom periods in post-independence Zambia, it is shown that both in terms of the occurrence and political dynamic, privatization and liberalization can radically alter the resource curse phenomenon. Liberalization and privatization of the copper sector has brought about improved macroeconomic performance, and as such the curse does not seem to reemerge in Zambia. This is explained by exploring the changes in the political dynamics between the two booms. This analysis shows that the World Bank and IMF have been central in bringing about change in the second period, as have the new multinational mining investors. These actors are notable by their absence in the mainstream resource curse literature. While the hurtful dynamics of the resource curse do not reemerge after privatization and liberalization in Zambia, it is argued that the new situation is not sustainable in terms of development. Furthermore, it is argued that there is some tentative evidence showing that the findings from the Zambian case study can be inferred to a range of other resource-rich developing countries. Lastly, five hypotheses are developed. Together, these hypotheses challenge many of the key assumptions and understanding within the contemporary resource curse literature. The key message of the thesis is that ownership, regulation, and the political dynamics needs to be dealt with in order to improve our understanding of development in resource-rich developing countries.

TRANSCRIPT

Page 1: Privatization and liberalization of the extractive industry in Zambia – Implications for the resource curse

PRIVATIZATION AND LIBERALIZATION OF THE

EXTRACTIVE SECTOR IN ZAMBIA

- IMPLICATIONS FOR THE RESOURCE CURSE

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

Master thesis, Aarhus University, Department of Political Science

Author: Christian Hallum

Student number: 20041854

Thesis supervisor: Anne Mette Kjær

Number of words: 35.877

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Privatization and liberalization of the extractive industry in Zambia – Implications for the resource curse

1

CONTENTS

LIST OF FIGURES AND TABLES ........................................................................................................................... 3

ABSTRACT ......................................................................................................................................................... 4

1. INTRODUCTION .......................................................................................................................................... 5

2. THEORY: THE RESOURCE CURSE, OWNERSHIP, REGULATION AND POLITICS ............................................. 7

2.1. Demarking the resource curse ........................................................................................................... 7

2.2. What causes the resource curse? ....................................................................................................... 8

2.2.1. Explanation 1: Neo-patrimonial politics and rent-seeking ..................................................... 10

2.2.2. Explanation 2: Lack of personal taxation ............................................................................... 12

2.2.3. Explanation 3: State-led industrialization ............................................................................... 13

2.2.4. Summing up: The three explanations of the resource curse .................................................... 14

2.3. Challenges to the resource curse ..................................................................................................... 15

2.3.1. Empirical challenges – tinkering with the statistics of the resource curse ............................. 15

2.3.2. Theoretical challenges to the resource curse .......................................................................... 17

2.3.3. Summing up: The challenges to the resource curse ................................................................ 19

2.4. Theoretical deliberations on ownership structures and regulation .................................................. 19

2.4.1. Theoretical expectations on the effects of ownership and regulation ..................................... 20

2.5. A theoretical framework for the analysis: Bringing politics back in ............................................... 24

2.5.1. Summing up: The theoretical approach .................................................................................. 27

3. METHODOLOGY ....................................................................................................................................... 27

3.1. Why and how to use the case study approach? ................................................................................ 27

3.2. Why Zambia? .................................................................................................................................. 30

3.3. Operationalizations – connecting theory with data ......................................................................... 32

3.3.1. National and private ownership .............................................................................................. 32

3.3.2. Privatization and liberalization ............................................................................................... 32

3.3.3. The resource curse and development ...................................................................................... 33

3.3.4. Specifying the boom periods .................................................................................................... 33

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

4. ANALYSIS: COPPER BOOMS IN ZAMBIA THEN AND NOW - THE ROLE OF PRIVATIZATION AND

LIBERALIZATION .............................................................................................................................................. 35

4.1. Comparing the economic management of the two booms ............................................................... 35

4.1.1. Boom 1: Nationalization, state-led industrialization and economic decline ........................... 35

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4.1.2. Boom 2: Privatization, liberalization and macroeconomic stability ....................................... 39

4.1.3. The sustainability of the current model ................................................................................... 43

4.1.4. Summing up: The economic analysis ....................................................................................... 47

4.2. Political analysis: The dynamics of the curse under national and private ownership ..................... 47

4.3. The political dynamic during the first boom ................................................................................... 48

4.3.1. Nationalization and its effects on development coalitions ...................................................... 48

4.3.2. Summing up: The political dynamic of the first boom period.................................................. 54

4.4. 1991-2010: The privatization and liberalization agenda and its consequences ............................... 55

4.4.1. Part 1: Privatization and liberalization in the early 1990s - The state-donor coalition ......... 55

4.4.2. Part 2: Privatization and liberalization of the mines: Donor dominance ............................... 59

4.4.3. Part 3: The boom of the 2000s: Understanding the unsustainable development model ......... 60

4.5. Summing up: Booms then and now – ownership and regulation as the missing piece ................... 66

4.6. Controlling for third variables: The effects of institutions .............................................................. 68

5. DISCUSSION: THE RESOURCE CURSE, OWNERSHIP, REGULATION AND POLITICS ..................................... 71

5.1. Inferring to the resource curse theory .............................................................................................. 71

5.1.1. Hypothesis 1: Unearned income is an independent and dependent variable .......................... 71

5.1.2. Hypothesis 2: Institutions are shaped by politics .................................................................... 73

5.1.3. Hypothesis 3: The political actors involved in resource-rich developing countries matter .... 75

5.2. Inferring to other countries .............................................................................................................. 77

5.2.1. The relevance of the neo-liberal extraction model of Zambia ................................................. 77

5.2.2. Hypothesis 4: History matter ................................................................................................... 81

5.2.3. Hypothesis 5: The problem of natural resources needs to be reframed .................................. 85

6. CONCLUSION............................................................................................................................................ 86

REFERENCES .................................................................................................................................................... 89

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LIST OF FIGURES AND TABLES Page

Figure 2.1.: Schematic representation of the resource curse hypothesis 10

Figure 3.1.: The methodological set-up of the case study 29

Figure 4.1.: Average Annual Copper Prices, 1960-2008 34

Table 4.1.: Parastatals share of the Zambian economy, 1968-1972 36

Table 4.2.: Total capital investment in Zambia, 1954-1970 37

Figure 4.2.: Fiscal revenue from mining, 1980-2008 40

Table 4.3.: Key macroeconomic indicators, Zambia 1965-2009 42

Table 4.4.: Adjusted net savings for Zambia, 2001-2007 46

Table 4.5.: Taxes, grants and budget balance 2006-2007 61

Table 4.6.: Differences between period 1 and 2 68

Figure 5.1.: The causal effects of regulation and ownership on the resource curse 73

Figure 5.2.: The relationship between politics and institutions 74

Table 5.1.: Percentage of oil and gas production undertaken by foreign companies (by

region)

78

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ABSTRACT

Privatization and liberalization of the extractive sector in Zambia

- Implications for the resource curse

This thesis seeks to analyze what the effects of privatization and liberalization are on the occurrence

and political dynamic of the resource curse phenomenon in developing countries. This is deemed

highly relevant as the existing literature has not paid much attention to this issue despite the fact

that many resource-rich developing countries have liberalized and privatized their extractive sector

in recent years. Through an analysis of two separate boom periods in post-independence Zambia, it

is shown that both in terms of the occurrence and political dynamic, privatization and liberalization

can radically alter the resource curse phenomenon. Liberalization and privatization of the copper

sector has brought about improved macroeconomic performance, and as such the curse does not

seem to reemerge in Zambia. This is explained by exploring the changes in the political dynamics

between the two booms. This analysis shows that the World Bank and IMF have been central in

bringing about change in the second period, as have the new multinational mining investors. These

actors are notable by their absence in the mainstream resource curse literature. While the hurtful

dynamics of the resource curse do not reemerge after privatization and liberalization in Zambia, it is

argued that the new situation is not sustainable in terms of development. Furthermore, it is argued

that there is some tentative evidence showing that the findings from the Zambian case study can be

inferred to a range of other resource-rich developing countries. Lastly, five hypotheses are

developed. Together, these hypotheses challenge many of the key assumptions and understanding

within the contemporary resource curse literature. The key message of the thesis is that ownership,

regulation, and the political dynamics needs to be dealt with in order to improve our understanding

of development in resource-rich developing countries.

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1. INTRODUCTION

Since 2002 the global economy has witnessed a boom in the prices of natural resources larger than

anything experienced since the 1960s and 70s. The price of oil, natural gas, and minerals are

reaching new unprecedented levels as this is written, largely as a consequence of the expanding

demand from China and other emerging economies (Mayer & Fajarnes, 2005: 14-15; Avendaño et

al., 2008: 11).

Might this signal a new dawn for many developing countries? After all, approximately 29 percent of

the poorest 1 billion people live in countries that are heavily dependent on exporting natural

resources (Collier, 2008: 39). The windfall earnings from a booming natural resource sector could

potentially help lift millions of these people out of extreme poverty.

An influential strand within development studies brushes such optimism aside and warns that the

current rise on commodity prices could as well be a ―false dawn‖ (Collier, 2008: 2). According to

this literature, countries that are reliant on natural resources experience lower growth (Sachs &

Warner, 1995; Collier & Hoeffler, 2007; Kolstad, 2009), experience more armed conflicts (Collier,

2008: 38-56; Hilson & Machonachie, 2009: 60; Torvik, 2009: 248-250; Rosser, 2006: 9-10), and

are less democratic (Rosser, 2006: 10). This counter-intuitive idea that resource-wealth hinders

rather than promotes development has become known as the resource curse (Auty, 1993). So

influential is this notion of a resource curse that it has arguably become conventional wisdom in

much of academia, as well as among donors and NGOs working in resource-rich developing

countries (Rosser, 2006: 7; Jones, 2008: 12; Bridge, 2008: 393).

The resource curse builds its findings primarily on the experience from the boom in the prices of

natural resources that occurred in the 1960s and 1970s (Oskarsson & Ottosen, 2010: 1068). With

few exceptions, almost every resource-rich developing country in these years managed to turn the

favorable situation of high prices for their prime exports into an economic disaster. It has

increasingly been acknowledged that the explanation for this perverse outcome should be found in

the political choices made during the boom in these countries (Rosser 2006: 14; Karl, 2007: 256).

Perhaps then, one of the most important questions raised by the current boom in natural resources is

whether the mistaken choices made during the boom in the 1960s and 1970s are likely to be

repeated this time around. It is this question that is the main motivation for this thesis.

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Several aspects have changed since the previous boom. While many factors could be analyzed, this

thesis will argue that an issue that is both potentially highly relevant and at the same time highly

understudied within the existing resource curse literature is that of ownership structures and

regulation of the extractive sector.

During the previous boom, national ownership of the extractive sector was the norm (Jones, 2005:

67). However, from the 1990s and onwards, there has been a major shift towards privatizing and

liberalizing the extractive sector in developing countries (ibid.: 70). This shift could be highly

relevant since the resource curse phenomenon assumes that the state has a high degree of political

control over the extractive sector and receives large amounts of revenue from the sector (Luong &

Weinthal, 2006: 242). Privatization and liberalization might affect the validity of these assumptions.

Furthermore, while it is plausible that privatization and liberalization are important for the curse, it

has so far received very little academic attention (ibid.; Jones, 2008: 21). From this it is hoped that

the relevance of this thesis will be clear.

Having laid out the motivation and relevance of this thesis, the research question which will guide

this study can be specified in the following manner:

What are the effects of privatization and liberalization of the natural resource sector

for the occurrence and political dynamic of the resource curse?

As will be argued in the methodological section, a suitable way of analyzing this question is

through a case study of Zambia and its copper sector. The case study will compares Zambia‟s

experience during two separate booms, each with different ownership structures and regulatory

environment.

The thesis will be structured in the following manner. Following this introduction, chapter two will

deal with the theoretical issues that this thesis raises. This will include a more thorough discussion

of the resource curse literature. The theoretical approach to answering the research question will

also be specified. In chapter 3 I will expand on the methodological arguments for choosing the

single case study approach, why Zambia is an optimal case in this regard, and how key concepts are

operationalized. In chapter 4 the analysis will be presented. This will deal with both the potential

changes in the occurrence and political dynamics brought about by the change in ownership and

regulation. Chapter 5 will discuss the implications of the analysis and will develop some tentative

hypotheses from this. Lastly, some concluding remarks will be presented.

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A key message to emerge from this thesis is that privatization and liberalization do have the

potential to radically alter the resource curse phenomenon. The traditional understanding of the

resource curse seems to be associated with national ownership and strict regulation. The fatal

choices made during the previous boom do not re-emerge after privatization and liberalization in the

Zambian case. As will be argued, however, privatization and liberalization do unfortunately not

bring about a sustainable situation in terms of promoting development. The specifics of this

argument and the wide implications it has for academia, donors, and resource-rich countries will

hopefully become clear for the reader in what follows.

2. THEORY: THE RESOURCE CURSE, OWNERSHIP,

REGULATION AND POLITICS

In this chapter I will explore the theoretical issues that will need to be dealt with in order to answer

the research question. This will involve five steps. Firstly, I will specify how I utilize the concept of

the resource curse in this thesis. Secondly, I will present the explanations in the contemporary

literature for why the resource curse occurs. Thirdly, I will discuss some of the criticisms leveled

against the resource curse. Fourthly, I will discuss the theoretical expectations of privatization and

liberalization on the occurrence and dynamic of the resource curse. Finally, drawing on the previous

sections, I will develop my own theoretical approach to answering the research question.

2.1. Demarking the resource curse

Paradoxically, as the resource curse has become conventional wisdom it has at the same time

become less clear what is actually meant when referring to the resource curse (Jones, 2008: 37).

While the claim originally was that natural resources brought lower growth rates to resource-rich

countries, the literature has expanded to also cover the relationship between resources and conflict

and authoritarianism, each spawning their own separate literature (Rosser, 2006). Additionally, it is

unclear what is actually meant by ―natural resources‖. Some take natural resources to refer to all

agricultural production, oil, gas, and minerals (see for example Sachs & Warner, 1995). Others

argue that agricultural production should not be included (see for example Collier & Goderis, 2008:

7-10). Furthermore, while the initial work on the resource curse claimed general validity for all

resource-rich countries, contemporary work focuses overwhelmingly on a sub-set of countries,

namely the poorest developing countries rich in natural resources.

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In order to analyze and discuss the resource curse it is therefore necessary first to clarify how the

concept will be used. I take the resource curse to refer to the economic part of the literature, e.g. the

claim that a reliance on natural resources tends to worsen economic performance. This is done in

order to separate the complex interactions between economy, civil war, and democracy that

otherwise occurs. In addition, using this narrow definition of the resource curse goes to the core of

the problem, as the economic implications of relying on natural resources is arguably the central

part of the literature. Additionally, I will take natural resources only to refer to non-renewable

products, such as oil, gas, and minerals. I choose only to focus on these as it is increasingly

acknowledged that the findings of the curse rely on these commodities, not the agricultural sector

(Collier & Goderis, 2008; Bulte et al., 2003; Mehlum et al., 2006a). Furthermore, I choose to follow

the contemporary writing on the curse in focusing on the poorest developing countries, mainly

situated in sub-Saharan Africa and Latin America. This leaves out many important resource

exporters, such as those in the Middle East. However, for analytical clarity this is deemed

necessary. Also, as the policy implications drawn from the resource curse are overwhelmingly

focused on the developing countries, it would seem most fruitful to focus on these countries.

Having specified what the resource curse is and how I intend to utilize the concept in this thesis let

me now turn to the issue of what the causes the resource curse.

2.2. What causes the resource curse?

In order to assess how privatization and liberalization might affect the resource curse phenomenon

we first need a clear understanding of how the curse operates. Providing such an account is the

purpose of the following.

The early literature on the curse was mostly interested in establishing whether there was a curse,

which they generally found support for (Sachs & Warner, 1995; 2001). The curse was mostly

explained with reference to purely economic factors. The main explanation to come out of this

strand of literature was the Dutch disease effect. According to this explanation, growth is lowered

by the influx of foreign currency during a resource boom, leading to an appreciation of the local

currency, which renders local manufacturing and agriculture uncompetitive in the global market

(Sachs & Warner, 1995). Another explanation during this phase of writing was that the volatile

prices of natural resources hurt economic progress due to increased investment risks and problems

of macroeconomic management (Van der Ploeg & Poelhekke, 2009). These economic explanations

are today ―regarded with some skepticism‖ (Rosser, 2006: 14). All countries rich in natural

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resources have had a large influx of foreign currency and have faced volatile prices, but their

experiences varies enormously, a fact that the economic explanations provide little insight into

(Jones, 2008: 15).

A consensus is therefore emerging that economic explanations cannot be the whole story and in

themselves do not explain much (Bulte, 2005: 1030; Kolstad & Wiig, 2009: 5318; Boshini et al.,

2007: 596-597; Caselli & Cunningham, 2009: 629; Sachs, 2007: 181). Instead, a consensus has

emerged that the resource curse is caused by poor economic management and thus invariably

involves the political system (Rosser 2006: 14). As Karl notes: ‖The ‘resource curse‘ is primarily a

political and not an economic phenomenon‖ (2007: 256). As a result, this thesis will not focus on

these purely economic explanations, but will instead give attention to the politics behind the curse.

Politics is also key concern for the more contemporary writing on the curse. This part of the

literature argues that the problem of resource-wealth can be traced to the amount of rents and

unearned income generated by the natural resources (Collier & Hoeffler, 2007: 18; Jones, 2008: 20-

21; Moore, 2004: 304-305; Kolstad & Wiig, 2009). Rents can be defined as returns to capital that

are in excess of costs and above the profit rate that can be acquired from regular market activities

(Kolstad & Wiig, 2009: 5317). Due to market imperfection, the extractive industry is renowned for

its potential for high rents during a boom period (Jones, 2008: 7).

A common, although often implicit assumption of this line of thinking is that these rents spill over

into the political system through taxation as unearned income (Karl, 1997: 48-49; Collier &

Hoeffler, 2007: 7; Robinson et al., 2006: 449). Unearned income is government revenue that the

state acquires with little or no organizational and political effort, and with little effort in relation to

their domestic population (Moore 2004: 304). Unearned income is then taken to be the defining

characteristic of the state in resource-rich developing countries (Karl, 1997: 48-49). The problem of

unearned income is assumed to arise in the crucial period in which the prices of the resources

increase rapidly, a so-called boom period (Collier & Hoeffler, 2007; Tornell & Lane, 1999). In such

a period it is assumed that both rents and unearned income increases rapidly (Auty, 1993: 18; Karl,

1997: 48-49; Jones, 2008: 15).

As I will demonstrate in the sections that follow, for most of the current writers on the resource

curse it is this characteristic of high rents and unearned income during a boom period that produces

the negative effects of the resource curse.

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This, however, does not explain why some countries with natural resources have succeeded while

others have not. To explain this, the contemporary writers on the resource curse invoke institutions

as the missing link in the explanation. According to this line of thinking, unearned income only

becomes a problem under conditions of weak institutions (Jones, 2008: 13) - a notion that has been

confirmed through several statistical tests (Bulte et al., 2003; Boschini et al., 2007; Collier &

Hoefler, 2007; Tornel & Lane, 1999; Mehlum et al., 2006a; Robinson et al., 2006; Kolstad & Wiig,

2009) and case studies (Auty, 1994; Karl, 1997). The literature‟s understanding of good institutions

reflects the standard good governance notion, highlighting as it does the importance of the rule-of-

law, transparency, accountability, and checks-and-balances (Jones, 2008: 14). Figure 2.1 replicates

the contemporary explanation of the resource curse in a simplified manner.

Figure 2.1.: Schematic representation of the resource curse hypothesis

Figure 2.1. shows that the political and economic dysfunctions become worse as institutional

quality becomes worse, and conversely, improves as institutional quality becomes better.

But how exactly does rents and unearned income produce political and economic dysfunctions? I

will argue that there are three main explanations for this in the contemporary resource curse

literature. While not an extensive list of all explanations presented within the literature, each of

these three explanations have been supported by several writers within the resource curse literature,

have been widely cited, as well as being reflected in donor initiatives to counter the resource curse.

As such, I judge these to be the three most common and influential explanations1.

2.2.1. Explanation 1: Neo-patrimonial politics and rent-seeking

According to the first explanation, unearned income is assumed to have two effects on the political

system. Firstly, ―mining revenues alter the framework for decision-making‖ among politicians,

making redistributive neo-patrimonial politics more likely (Karl, 1997: 44). Secondly, rent-seeking

1 For alternative literature reviews of the resource curse see Rosser, 2006, Bulte et al., 2003: 4-11.

Natural

resources

Rents Unearned

income

Political

dysfunctions

Economic

dysfunctions

Institutions

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activity increases, whereby domestic actors try to extract revenue from the state rather than engage

in productive economic activity (Kolstad & Wiig, 2009). These problems arise where institutions

are weak (ibid.). The distinction between neo-patrimonialism and rent-seeking is thus that the first

refers to the state‟s reaction to the windfall and the second to the reaction of individuals or groups in

society (Kolstad & Wiig, 2009: 5318).

Concerning the first model, neo-patrimonialism sees the political system as a mix of patrimonial

and legal-bureaucratic rule, two of Weber‟s classic ideal types of governance. In the patrimonial

model power is completely personalized in one ruler and hence a distinction between the public and

private cannot be made. In the legal-bureaucratic model power is vested in formal rules and

administered by a professional and legally bound bureaucracy (Erdmann & Engel, 2006: 18). While

acknowledging that neo-patrimonialism as a concept is not confined to resource-rich developing

countries, writers on the resource curse highlight that the vast amount of unearned income accruing

to the government has the effect of making neo-patrimonial politics all the more likely in these

societies (Karl, 2007: 262).

Neo-patrimonial politics is based on the assumption that political leaders will try to maximize their

time in office. The windfall that accrues to the state during a boom in the prices of natural resources

lets the political leaders to rely on redistributive politics in order to secure support, rather than

focusing on creating economic growth (Kolstad & Wiig, 2009: 5318-5319; Karl, 1997: 41).

Consequently, resource-rich states ―do not need to formulate anything deserving the appellation of

economic policy; all [they need] is an expenditure policy‖ (Rosser, 2006: 16).

This creates several problems. Firstly, the redistributive politics can create large amounts of

corruption when there are few institutional controls on the political system, which in turn weakens

economic performance (Sala-i-Martin & Subramanian, 2003). Secondly, the large and sudden

increase in public spending and investment as redistributive policies are implemented has the

effects of overheating the economy, thereby creating large inefficiencies and inflation (ibid.; Karl,

1997: 28). This is so since revenue tends to be spent at a pace which is economically unsound, a

phenomenon which has been termed the “voracity effect‖ (Tornell & Lane, 1999). Thirdly, the

massive redistributive policies tends to create unsustainable debts, as public investments are

financed on the projection of future earnings from the resource sector, and new spending proves

difficult to scale back once revenue from the natural resource boom dry up (Karl, 1997: 29-30;

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Auty, 1993). These three effects have received support through numerous empirical studies

(Robinson et al., 2006: 448; Torvik, 2009: 246; Tornell & Lane, 1999).

According to the second model, the rent-seeking explanation, non-state actors will attempt to obtain

some of the massive revenue flowing into the state after a boom (Karl, 1997: 56; Mehlum et al.,

2006b). Under condition of weak institutions, entrepreneurs will spend less time on productive

economic activity and more time trying to extract revenue from the political system (Mehlum et al.,

2006b: 1121). This bottom-up approach highlights that the increase in public spending following a

boom is also driven by a demand from the population and adds a negative outcome to the list of ills

already described by the neo-patrimonial explanation, namely that productive entrepreneurial

activity is lowered (ibid.: 1122).

2.2.2. Explanation 2: Lack of personal taxation

The second contemporary explanation of how resource-rich countries fail to develop is focused on

tax structure:

―…a weak (or nonexistent) tax regime is viewed in the resource curse literature as

perhaps the most prevalent negative outcome of resource wealth‖ (Luong &

Weinthall, 2006: 251)

This explanation is centered on the notion that “[t]he revenues a state collects, how it collects them,

and the uses it puts them to defines its very nature‖ (Karl, 2007: 259). This line of thinking lends

from Tilly‟s influential work on state-building (ibid.: 260). According to this, modern states

emerged in Europe due to the pressures imposed on the state in order to finance itself. This

produced the need for taxing the population, which created two effects. Firstly, it necessitated

bargaining with the population as subjects were more likely to pay their taxes if they felt that the

state had legitimacy, bringing about demands for representation in exchange for taxation, thereby

helping in bringing about modern representative politics (Moore, 2004: 302). Secondly, the

demanding task of collecting tax made it necessary for the state to build a modern bureaucracy

(ibid.: 298).

In the resource curse literature, these effects are then contrasted to the situation in resource-rich

developing countries. Here it is assumed that the high degree of natural resource wealth means that

resource-rich states are “relieved of the burden of having to tax their own subjects‖ (Karl, 2007:

256).

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Having been relieved of this burden, these states not only fail to build modern bureaucracies, but

also fail to enter into bargaining over rights with their population (Moore, 2004: 313; Collier &

Hoeffler, 2007: 11). Instead the resource-rich states enter into bargaining with foreign companies,

thereby creating a centralized state (Karl, 2007: 262-263).

This problem of centralization and lack of bargaining with the population is strengthened as there is

also a lack of demand for government accountability from the population, as this demand is

assumed to be the outcome of citizens being ―provoked into scrutiny [of the government] by

taxation‖ (Collier & Hoeffler, 2007: 11-12).

The effects on economic performance of these tendencies are dismal, according to the curse

literature. The lack of accountability produces few checks and balances on the political system,

which has been shown to be one of the most important institutional factors in determining whether

resources become a curse or a blessing (Tornell & Lane, 1999: 42; Collier & Hoeffler, 2007).

Furthermore, the lack of a modern bureaucracy and checks and balances on the political system

reinforces the problem of neo-patrimonial politics, as described above. Lastly, the lack of a modern

bureaucracy produces a state which is ill-equipped for implementing programs for economic and

social development (Karl, 1997).

2.2.3. Explanation 3: State-led industrialization

The last explanation in contemporary writing is focused on how rents and unearned income promote

a highly statist approach to industrial policy, including strategies of import substitution

industrialization (ISI).

This hypothesis gained support by Sachs and Warner‟s groundbreaking statistical tests, which found

that countries that are reliant on natural resource exports tend to have more protectionist trade

policies (1995: 19-21).

Auty notes that most developing countries in the 1950s and 1960s adopted a statist approach to

development. However, he also demonstrates that resource-poor countries abandoned their statist

policies in favor of more market and export-oriented policies much earlier than their resource-rich

counterparts. The key to understanding why resource-rich countries sustained their economically

hurtful statist policies, Auty argues, was the easy access to foreign exchanges from the natural

resource sector (Auty, 1993: 257; Auty, 1994: 24). Import-substitution can only continue as long as

the state has access to foreign reserves, which is predicated on a strong exporting sector. This

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relieves the pressure to promote a competitive manufacturing sector (ibid.). At the same time, the

longer import substitution is tolerated, the more entrenched these special interests become, and

hence make adjustment towards competitive manufacturing more difficult with time (ibid.).

Others have found support for this argument through case studies (Karl, 1997: 25; Karl, 2007: 264;

Doner et al., 2005: 328). Adding to Auty‟s argument, these other writers not only focus on foreign

reserves, but also on the state‟s revenue base, arguing that the easy access to unearned income in

resource-rich countries make state-led industrialization more plausible in these countries, to the

detriment of long-term development (ibid.).

Unfortunately, due to the two other explanations mentioned in the previous sections, the resource-

rich states were ill-equipped at implementing industrial policies as they lacked an efficient

bureaucracy, a political system that could keep politicians accountable, and at the same time faced a

rent-seeking population, as well as incentives to promote unsustainable neo-patrimonial

redistributive policies. The state-led industrialization programs were therefore a failure in most

resource-rich countries, leaving a legacy of debt, inflation, and a bloated state, rather than a

competitive manufacturing sector.

2.2.4. Summing up: The three explanations of the resource curse

Drawing on all three explanations presented above, the fate of resource-rich developing countries

indeed seems cursed. This is not least the case since all the explanations have been verified

empirically in the scholarly work cited in the previous three sections. Below I will highlight a few

of the main points to come out of the three explanations.

Firstly, all three explanations provide a strong argument for the primacy of politics and institutions

in determining whether the resource curse becomes a problem or not. All point to the causal

mechanisms pointed out in figure 2.1., namely that the influx of unearned income into the state sets

in motion a process of political dysfunctions, which lead to economic dysfunctions. The quality of

the country‟s institutions alone determines how widespread the political and economic dysfunctions

become. Since all three explanations point to the importance of the political dynamics set about by a

boom period, this thesis will also focus on this area, which is reflected in the research question‟s

attention to ―political dynamics‖.

Secondly, it should be clear from the three explanations that although they vary, they still share

some basic assumptions. Thus, they all share the assumption that rents spill over into the political

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system as unearned income, and that this is the core problem of the resource curse. This has meant

that the resource curse is overwhelmingly focused on “sanitising the political effects of resource

rents“ in their policy prescriptions (Jones, 2008: 36). Furthermore, they all share the view that the

political and economic dysfunctions arise during the boom period. Equally, all three explanations

treat the state as the main political actor in resource-rich countries (Jones, 2008: 22). While the rent-

seeking and personal taxation explanation both give some attention to the interaction of state and

society, they still assume that the state can ultimately decide on its development strategy, taxation

structure, and spending policies.

2.3. Challenges to the resource curse

While the previous sections have shown that there is somewhat of a consensus on the empirical

reality of the resource curse, and the primacy of institutions in explaining whether it emerges or not,

it should be noted that the resource curse literature has in recent years increasingly come under

pressure from dissenting voices. As this thesis also seeks to engage critically in the debate on the

resource curse it is relevant to expand on these points of criticism, which will also help in

developing the theoretical approach taken to the research question.

The resource curse literature has been challenged on a range of areas where two stand out as

critical. The first is on the question of the validity and reliability of the results from the statistical

part of the resource curse literature. Secondly, the literature on the resource curse has also

increasingly been criticized for its lack of a coherent theoretical framework. These challenges

question the central part of the consensus on the resource curse today, namely that institutions are

the missing link in explaining the resource curse phenomenon. This thesis shares the skepticism of

explaining the resource curse with reference to the quality of institutions, and the policy

implications that follow from this. As such, it is worth exploring these arguments in greater detail.

2.3.1. Empirical challenges – tinkering with the statistics of the resource curse

While several case studies have found support for the resource curse hypothesis (Karl, 1997; Auty,

1993; 1994) it should be noted that the theory had its major breakthrough with the adoption of the

cross-country statistical tests employed by most contemporary writers on the curse. It is to this

statistical approach that the concerns over reliability and validity are primarily aimed.

Both the claim that resources promote conflict and authoritarianism has been shown to be sensitive

to the data used and the measures employed (Oskarson & Ottoson, 2010; Wacziarg, 2009;

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Rigterink, 2010; Basedau & Lacher, 2006; Nathan, 2005; Ross, 2010). Most importantly for the

purpose of this thesis, the claim that natural resources worsen economic performance has also been

challenged (Norrbin et al., 2008; Rambaldi et al., 2006; Brunnschweiler, 2008; Stijns, 2005).

These many empirical challenges are mainly a result of tinkering with the statistical model used for

testing the resource curse hypothesis. By including more years or adding or dropping cases, the

curse can suddenly disappear or look more like a blessing2. Additionally, by using different

measures for either natural resources or development, results have been produced that contradict the

resource curse, sometimes showing a strong and positive influence of natural resources on

economic development (Stijns, 2005; (Brunnschweiler, 2008).

The discussion on the best measures, or proxies, for testing the resource curse has mainly evolved

around the question of whether to use a measure of natural resource export dependence or natural

resource stocks. Using the former generally shows there being a curse, while using the latter

generally shows that there is no curse. It is unclear, however, that natural resource stocks is a good

measure since it does not indicate whether resources are being extracted and hence have entered

into the economy (Moore, 2007: 21; Kolstad & Wiig, 2009: 5324). However, the export measure is

not ideal either as there are concerns of endogenity. Thus, it might be that the causality runs from

weak economic growth to primary export dependence instead of the other way around (Jones, 2008:

19, 25-26 & 32; Rosser, 2006: 12). Consequently, as both dependence and abundance are flawed

measures of resource-wealth, several authors point out that the best measure would be the amounts

of rents generated by the natural resources, but there is no good data on this (Jones, 2008: 20;

Kolstad & Wiig, 2009: 5324).

However, even a measure of rents might be problematic from a theoretical standpoint, as the current

literature focuses more on the amount of unearned income than rents. It is assumed that there is a

straightforward relationship between rents and unearned income, but this might not be so. Thus, the

amount of unearned income received from the rents produced in this sector is mediated by local tax

laws and their enforcement, and hence rents can for example be high while unearned income is

relatively low due to liberal regulation, or vice versa. The best measure would therefore be

unearned income, but unfortunately data on this is difficult to access, as the extractive industry is

2 For example, Norrbin et al. show that excluding a single country from the dataset used by many of the writers on the

curse literature can render the correlation between natural resources and growth insignificant (2008: 191).

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renowned for its lack of transparency (Oskarson & Ottosen, 2010: 1072; Shaxson, 2007). Thus, it

would seem that statistical tests of the resource curse are condemned to rely on proxies that at best

are doubtful.

This does not imply that the resource curse can be discarded. As noted, several case studies have

shown that natural resources can in fact produce negative outcomes (Auty 1993; 1994; Karl, 1997).

However, it does mean that the many statistical studies, on which the argument of the primacy of

institutions largely hinges, are subject to reliability and validity problems. As such, we should

therefore not accept the resource curse as an empirical fact.

The implications are twofold. First, as the studies showing the importance of institutions has largely

been driven by statistical studies, we should probably treat this claim with caution. Secondly, as

good proxies are lacking, the statistical approach might not be the best way of exploring the

resource curse. Taking these two implications together, I argue in this thesis for an approach that is

skeptical of the importance of institutions, and which adopts the case study methodology rather than

the statistical approach.

2.3.2. Theoretical challenges to the resource curse

The literature on the resource curse has also increasingly been challenged due to its overemphasis

on correlation instead of causality (Rosser, 2006: 12). As noted earlier, the contemporary writers on

the resource curse have attempted to eradicate this shortcoming by invoking institutions as „the

missing link‟. However, for some this has not been enough.

This should come as no surprise as the way institutions are utilized in the literature is reminiscent of

the good governance approach to development (Jones, 2008: 6), which since its inception has been

criticized for its lack of theoretical grounding. As the concept of good governance does not come

with a clear definition, it can be difficult to capture what is actually meant by the term (Grindle,

2004: 526). It has been charged that this has made it difficult to use the good governance approach

for clear and meaningful policy prescriptions (ibid.). This is also seen in the contemporary writing

on the curse, where numerous proxies have been used to measure the elusive ‗good institutions‘3. It

is very rare to see any theoretical justification for using one measure of institutions over another in

the literature, and very rarely is the precise causal mechanism tested. The overwhelming number of

3 Examples include the rule of law (Kolstad, 2009: 441), freedom of the press (Kolstad & Wiig, 2009), elections

(Collier & Hoeffler, 2007), and checks and balances (ibid.).

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articles written on the curse is thus still more interested in presenting correlations rather than

developing a coherent theoretical framework for understanding the causal mechanisms of the curse

(Basedau, 2005; Jones, 2008; Rosser, 2006).

More seriously, it has been questioned whether the institutional approach has any meaningful

implications for resource-rich developing countries. Thus, it has been found that the institutional

quality needed to overcome the curse is staggeringly high. One author finds that institutional quality

has to reach the level of OECD-countries in order to lift the curse, which leads him to speculate

whether the policy recommendations flowing from the resource curse literature have any practical

meaning for developing countries:

―…the data indicate that institutions play no significant role in neutralizing the

resource curse precisely in the developing countries, where the resource curse is

commonly thought to exist‖ (Yang, 2008: 62).

Another author finds that out of a sample of 87 rich, middle income and low income countries, only

15 have high enough institutional quality to reverse the resource curse, again indicating the high

level of institutional quality needed (Torvik, 2009: 248).

This is worrisome as it suggests two things. First, it makes the good governance approach seem less

fruitful in providing any meaningful policy implications to the developing countries, where the

issue of the resource curse is most pressing. Second, it seems plausible that good institutions might

actually function as a proxy for developed nations, thereby measuring the outcome of development

rather than its cause (Grindle, 2004: 531; Chang, 2003: 117).

This is, however, not the only problem of the institutional approach to the resource curse. A

worrisome finding from the contemporary writings on the resource curse is that abundance of

natural resources tends to erode institutional quality in itself (Collier & Hoeffler, 2007: 30; Bulte et

al., 2003: 20). This is understandable from the three explanations of the resource curse presented

earlier, which all highlight how politicians face incentives to prioritize spending over state-building.

But if natural resources erode institutional quality, how are poor countries expected to break out of

this negative spiral? This question is left somewhat open by the literature, which has little to say on

how to change the dysfunctional political dynamics that sustain bad institutions.

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What we have is therefore a theory that might be able to explain variance on a global scale to some

degree, but which provides few policy implications that seem politically feasible to the poor

countries (Rosser, 2006: 26).

2.3.3. Summing up: The challenges to the resource curse

The points above suggest that the empirical foundation of the contemporary resource curse

literature is weaker than is generally assumed, both in terms of reliability and validity. Perhaps

more seriously, the theoretical explanation of the institutional approach also seems wanting in

several regards.

Two implications of the above follow for this study. Firstly, due to the shortcomings described in

the paragraph on the statistical approach to investigating the resource curse, a case study approach

will be adopted instead. This will hopefully ensure that the link between unearned income and the

political dynamics can be investigated in a more thorough way, without having to rely on weak

proxies. Secondly, as I have argued that the institutional approach to investigating the resource

curse does not seem satisfactory, I will instead focus on the issues of regulation and ownership

structure within the extractive industry. In what follows, I will discuss why and how ownership

structure and regulation might affect the resource curse in order to inform the analysis that is to

follow.

2.4. Theoretical deliberations on ownership structures and regulation

In the above it was argued that the institutional approach of the mainstream resource curse literature

has several shortcomings. As a consequence, this thesis seeks an alternative route to exploring the

resource curse. This will be focused on the effects that privatization and liberalization has for the

occurrence and dynamic of the curse. In order to inform the analysis, let me briefly reflect on what

the effects of liberalization and privatization might be on the resource curse.

While recent writing on the resource curse has focused extensively on the good governance type

institutions and their role in mediating the effects of the resource curse, it is noteworthy that very

little attention has been given to the institutional arrangement within the extractive sector.

Luong and Weinthal note that the lack of studies on the issue of ownership can be traced to a

common, although not always explicit assumption within the resource curse theory, namely that

state ownership prevails in developing countries. As a consequence, ownership structures have

largely been ignored in the current literature on the resource curse:

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‖Economists and political scientists alike have largely ignored the structure of

ownership over mineral resources as either a cause of the resource curse or a

possible solution. The main reason for this omission is the prevailing assumption

within the literature that mineral wealth is always and necessarily state-owned and

centrally controlled.‖ (2006: 243)

Furthermore, the authors note that the assumption of state ownership and control within the

literature is caused by the retrospective nature of much of the resource curse literature, focusing as

it does on the period preceding the mid-nineties:

―This widespread assumption [of state ownership] is both fostered and reinforced by

the fact that most of the literature on the resource curse focuses on the same

historical period—roughly from the late 1960s to the early 1990s—during which the

vast majority of mineral-rich countries exercised state ownership over their mineral

reserves.‖ (ibid.)

The problem with this assumption, as will be shown in the analysis and discussion, is that

ownership structures and regulation within the extractive sector in developing countries has

changed significantly from the 1990s and onwards. The change consists of a shift from national

ownership and strict regulation towards private foreign ownership and liberal regulation of the

sector.

The resource curse literature still has not grappled with the consequences of this major shift, but has

instead begun to give policy prescriptions to developing countries based on the experiences from

previous decades under state ownership. However, the question of whether we can infer from the

past to present, when ownership structure and regulation has changed significantly, looms. It is to

this question that the thesis wishes to contribute.

In order to inform the analysis I will now outline the theoretical expectations of the effects of

privatization and liberalization on the resource curse.

2.4.1. Theoretical expectations on the effects of ownership and regulation

How might different types of ownership and regulation affect the resource curse phenomenon?

Below I will reflect on this question and thereby inform the focus of the analysis that is to follow.

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Auty points to “a wave of nationalizations of mining firms in developing countries which reached a

peak in the late 1960s and early 1970s‖ (1993: 27). The effects of this, he argues, were that

management of the resource sector deteriorated, as the sector was steered away from commercial

interests to political (ibid.).

This interpretation raises the prospect that at least some of the problems of the resource curse can be

traced to bad management in the resource sector as a consequence of state-ownership. Theoretically

we might then expect that privatization of the resource sector could help in bringing in more

competent management that could withstand the harmful effects of political interference. As was

noted in the previous sections, the root of the resource curse problem has been described as the

political control over rents from the extractive sector. Privatization might reduce this problem by

limiting the politicians‟ possibility of using the extractive companies as their personal cash cow,

thereby reducing corruption and improving transparency in the sector.

Privatization also creates strong non-state actors in the form of the private companies that carry out

resource extraction. One possibility could be that these companies would have a vested interest in

sustaining a free market structure which could benefit national development and do away with the

statist approach to development.

Furthermore, liberalizing the regulation of the sector might also have positive effects. Thus,

reducing the tax burden on the sector through liberalization of the tax code might help ensure that

the negative effects of unearned income accruing to the state are dampened.

Forceful as the above theoretical arguments are in favor of a positive effect of privatization and

liberalization, counter arguments can also be made. Stiglitz thus notes that undertaking the task of

privatizing the extractive industry can be difficult for any state, especially if state institutions are

weak (2007: 23). Privatization can produce increased opportunities for corruption, both in the

privatization process itself and in the subsequent relationship between the new private owners and

the government (ibid.). Privatization and liberalization can especially become problematic if the

process is viewed as illegitimate by the wider population, an example being if the state-owned

companies are sold below market value or if regulation is limited (ibid.: 35). In this situation the

extractive companies will face uncertainty in their property rights and regulation and can therefore

engage in asset stripping, or build corrupt relationships with government in order to secure that

changes are not made to their regulation, despite popular pressure (ibid.).

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Additionally, while it might be an advantage that liberalization dampens the effect of unearned

income on the political system, for example through reform of the tax code, it should at the same

time be clear that the solution to the resource curse is not to completely forego any tax revenue from

the resources. It might be then that liberalization and privatization can reduce the tax-take from the

sector below a socially acceptable level, which could produce an unsustainable situation in terms of

long-term development.

Equally, while the stream of unearned income might be reduced, this does not necessarily mean that

corruption and rent-seeking will also decrease. This follows from the observation that the size of

rents and the opportunities for rent-seeking are not proportional:

―…van de Walle… has made the crucial point to discriminate between rent and rent-

seeking... Rents can decline while rent-seeking is increasing. Privatisation and

liberalisation might reduce the amount of rents, but increase rent-seeking...‖

(Erdmann & Engel, 2006: 27)

Privatization and liberalization involves complex negotiations between the government and the

private companies, not only as a one-off negotiation of the privatization process itself but also in

continuing negotiations over the regulation of the sector. These negotiations might create

opportunities for rent-seeking both for a corrupt government and for the private companies that

wish to reduce regulation. This point is also acknowledge by Karl, who notes that the neoliberal

approach of shrinking the jurisdiction of the state might limit some of the negative effects described

by the resource curse theory, but at the same time not solve the underlying problems of weak state

capacity:

‖… the overriding neoliberal preoccupation with shrinking the jurisdiction of the

state ignores the crying need to strengthen its authority. Predation is not simply a

function of state size. Although the removal of regulations, price controls, tariff

barriers, and the like may eliminate some of the arrangements that have fostered

rentier behavior, there is no guarantee that a more minimalist state will not simply

revert to new rentier arrangements in the future, especially if new booms occur. Nor

is there any guarantee that rentier havens will not simply relocate elsewhere, for

example via the privatization process…‖ (1997: 241-242)

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Keeping these theoretical arguments in mind, we are thus cautioned about the prospects of solving

the resource curse problem through privatization and liberalization.

Notice, however, that the arguments for and against privatization and liberalization of the resource

sector are relatively abstract. For example, Karl notes in the quote above that a new minimalist state

might revert to new rentier arrangements, while not specifying what these arrangements might look

like. Equally, Erdmann and Engel‟s point on the difference between rents and rent-seeking does not

give us any clues as to how rent-seeking might continue despite rents falling in size. This lack of

knowledge can be traced to the very limited attention that the issues of privatization and

liberalization have received in academic writing on the curse (Luong & Weinthal, 2005).

The lack of attention to these issues is somewhat of a paradox as the arguments presented in this

section show that privatization and liberalization goes to the core of the resource curse, namely the

amount of unearned income accruing to the state and the amount of political control over the sector,

main issues in all three contemporary explanations for the curse presented earlier. Instead, much of

the literature has assumed that there is a straightforward relationship between natural resources and

unearned income:

―…it stands to reason that the volume of resource rents going to the public purse is

not ‗manna from heaven‘ but rather reflects complex endogenous processes,

including how resource contracts are negotiated and the nature of foreign

involvement in the sector. To this author‘s knowledge, no study seems to have

adequately addressed this issue either theoretically or empirically.‖ (Jones, 2008:

21)

Having read through large parts of the curse literature, I share Jones‟ assessment of the lack of both

theoretical and empirical studies that treat unearned income as a dependent variable itself, rather

than assuming that all resource-rich countries are characterized by seemingly endless streams of

government revenue from the resource sector, while having large political influence over the

extractive sector. Therefore, this thesis will try to go beyond the sketchy theoretical arguments

made above, and through grounded empirical analysis hopefully provide new insights into how

privatization and liberalization affect the occurrence and political dynamic of the resource curse.

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Having now made the argument for focusing on privatization and liberalization of the resource

sector, the question of how to do this in a theoretically sound manner arises. This question will be

pursued in the next section.

2.5. A theoretical framework for the analysis: Bringing politics back in

So far, it has been argued that instead of focusing on institutions as the only factor influencing the

curse, we should guide our attention to the issues of privatization and liberalization of the extractive

sector. In specifying the best theoretical approach to studying these issues, two broad implications

can be drawn from the above sections.

Firstly, a grounded approach is needed, by which is meant an approach that gives attention to the

causal mechanisms involved in the curse. This follows from the point that the preoccupation with

statistical studies on the curse has been inadequate in this regard. This also follows from the fact

that our existing knowledge of how privatization and liberalization affect the curse remains weak,

as pointed out in the previous section.

Secondly, we will need to give attention to the political dynamics involved in the curse. This

follows from the observation that all three of the existing explanations for the curse point to the

political dynamic as essential for understanding the curse phenomenon. However, the way in which

politics has been utilized in the existing curse literature does not constitute a coherent theoretical

approach and as such needs some further remarks.

Let start by clarifying what is meant by the concept “politics”. In line with the tradition of Easton,

politics can be defined as involving the ―activities of conflict, cooperation and negotiation involved

in the use, production and distribution of resources‖ and is arguably central to any development

process as this itself involves new ways of using resources (Leftwich, 2000: 5). As was apparent

from the theoretical deliberations on the effects of privatization and liberalization, the issues of

ownership and regulation have large implications on politics in this sense, since they involve a

restructuring of the distribution of rents from the sector, as well as managerial control. As such,

regulation and ownership are inherently political and therefore, a theoretical approach that is

centered on politics is deemed relevant.

The attention to politics also follows a general trend in development studies, in which politics has

been given a more central role by a range of authors recently. In this regard, a central insight is that

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the state cannot be assumed to have autonomy from society. Instead, state action is seen as an

outcome of interaction between state and actors internal or external to society (Leftwich, 2000: 96).

A particularly insightful contribution to this line of thinking is Donor et al.‟s focus on ―growth

coalitions‖, where it is stressed that the state often enter into coalitions with non-state actors in

order to govern, and that the nature of these coalitions determine development outcome (Donor et

al., 2005). Central to this approach is the claim that state autonomy cannot be assumed, as the

resource curse tends to do. Instead, politics is seen as a complex interaction of actors, the state being

only one among others. This thesis adopts this theoretical approach.

From this, the question of which non-state actors to include in a political analysis of resource-rich

societies arises. I will argue that there are at least four such actors that need to be included. Firstly,

there are the companies that carry out the resource extraction. Secondly, there are the donor

community, especially the World Bank and IMF. Thirdly, there are the societal groups in the

resource rich countries that have a personal stake in the resource extraction. Lastly, the state is of

course still a central actor and as such will also be analyzed. Below I will argue for the inclusion of

each of these actors.

Concerning the companies it should be clear that if politics involve the struggle over the distribution

of resources, they are indeed highly involved in politics. This is the case since resource extraction

involves negotiations over contracts and regulation with the state in order to secure the right to

resource extraction and the terms of this extraction, which have implications for the distribution of

resources between the company and the state (Stiglitz, 2007: 23). This characteristic of the

extractive industry is due to the legal principle by which natural resources fall under the ownership

of the sovereign state4, which means that resource extraction is always within the field of the

political.

In relation to the donor community, especially the World Bank and IMF, it should also be clear that

these are in fact political actors with influence in most developing countries. It has been argued by

others that most developing countries have had to satisfy two constituencies in their policy choices:

The domestic majority and the external donors and creditors (Abrahamson, 2000: 117). Attention to

the donors will therefore be given.

4 This principle was institutionalized in international law through a UN declaration from 1962 (Jones, 2008: 8). The

notable exception to this principle is the USA (Valérian, 2010).

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Thirdly, the societal groups in the countries where the natural resources are extracted are important.

Even in countries that have traditionally been thought to have a high degree of state-autonomy it has

been shown by this research that societal groups have in fact played an important constraining

factor on state elites (Donor et al., 2005; Hee-Yeon, 1998; Pempel, 1999), and as such it is deemed

relevant to give more attention to non-state actors than the existing curse literature does. But which

elites or groups should be included in an analysis of resource-rich societies?

For one, the different classes can be seen as actors. Class analysis has sometimes been derided as

unimportant in relation to developing countries because class mobilization is often low and other

identity factors are often more important, for example ethnic identity (Weiner, 1987: 47). However,

this is not necessarily so in countries with a large extractive industry since this type of industry has

often created a highly mobilized and strong working class (Bates, 1971: 1; Bebbington et al., 2008:

901). Therefore, unions and workers could potentially be an important societal actor and will

therefore be given attention in the analysis. Conversely, the interaction between the state and the

local business sector has increasingly been recognized as an important factor in developing

countries (Evans, 1995; Doner et al., 2005), and the business sector will therefore also be included

in the analysis. Surrounding these actors is the wider domestic constituency. Through either

electoral processes or demands for regime change or a change in policy they can produce pressure

on the state. This will therefore also be given attention. A final societal group, which is overlooked

by the literature on growth coalitions and state-society interaction will also be included, namely the

NGO sector. Others have shown their increasing importance in relation to driving policy regarding

the extractive industry (Bebbington et al., 2008) and they will therefore also be given attention.

Lastly, the state will also be included. Little justification is needed for including this actor in a

political analysis. However, the concept of the state needs some clarification. When referring to the

state I am primarily aiming at the actors who have real influence over politics, e.g. on the

distribution of resources. In some countries, this will involve a broad range of actors, but in most

developing countries where the state is heavily centralized, the ruling elite often comprises a

relatively small amount of politicians in the executive. These rely on a bureaucracy in order to

implement their policies. Thus, when referring to the state I mean to imply both the political elite in

the executive and the bureaucracy.

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2.5.1. Summing up: The theoretical approach

The resource curse literature has over time developed several explanations of how the curse

surfaces. Central to these explanations is the focus on unearned income and rents. Three

explanations, all sharing this focus was presented. Furthermore, all three explanations share their

belief in institutional quality as the solution to overcoming the curse. However, recent research has

questioned both the approach taken in much of the statistical work being produced showing that

institutions are important. Furthermore, theoretically the institutional explanation seems wanting in

several regards. As a consequence, this thesis will take a non-statistical approach to answering the

research question. Additionally, due to theoretical shortcomings of the institutional approach,

attention will primarily be given to the political dynamic between actors of relevance, as this seems

perhaps a more promising approach.

Outlining the theoretical arguments for the effects of privatization and liberalization of the

extractive industry showed that forceful arguments could be made that these would be relevant for

the occurrence and political dynamics of the curse. However, this is an area that is so far not

covered adequately by other studies, and the theoretical arguments did not provide any clear

expectations. As such, the above has hopefully shown that there is a need to study further the effects

that privatization and liberalization have on the resource curse.

Having sketched the theoretical approach and argued for the relevance of the thesis, I will now turn

to the task of examining how to best investigate the research question.

3. METHODOLOGY

A good research design is “the logical sequence that connects the empirical data to a study‘s

research questions and, ultimately, to its conclusions‖ (Yin, 1994: 19). The goal of this section is to

specify a research design that accomplishes this in the best possible way.

Below I will argue that a comparative hypothesis-generating case study of Zambia is best suited for

answering the research question.

3.1. Why and how to use the case study approach?

Being able to follow the causal mechanisms of the resource curse is one of the key motivations for

choosing a country study in this thesis. This follows from the proposition developed in the

theoretical section, namely that the processes of politics and the actors involved in it are of

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importance. In order to study these processes and actors, one will need to use a methodological

framework that allows for great detail in the empirical investigation rather than using the broad

strokes of more quantitative methodologies. The single case study would seem best suited for this

(Basedau, 2005: 22). This also follows from the general observation that in-depth case studies are

best suited for research questions that ask the “how” and “why” type of questions explored in this

thesis (Yin, 1994: 20-21).

But why not choose the comparative research design instead of the single case study approach?

After all, the comparative study is often regarded as more rigorous than the single case study

approach (Lijphart, 1971: 691).

This is a valid objection that needs to be taken serious and it leads me to the question of how I will

use the single case study approach. Thus, I propose to use the single case study approach in a

comparative manner, comparing the same case over time. This combines the strength of the single

case study, which is the possibility for great detail and attention to causal mechanisms, with the

strength of the comparative method which, in its ideal form, is control for third variables (Sartori,

1991: 244).

By comparing the same country over time, it will be possible to approach the ideal of the most

similar system design (MSSD), which is to select cases that are alike on as many relevant variables

as possible, except for the independent variable (Bøgh & Bureau, 2007: 262; Sartori, 1991: 260;

Lijphart, 1971: 688). This is often difficult in comparative case studies where the unit of analysis is

a country, since it is difficult to find countries to compare where the control variable are equal

(Bøgh & Bureau 2007: 270-271; Lijphart, 1971: 689). However, by comparing the same country

over time this ideal is often easier to achieve (Gerring, 2001: 222-223; Lijphart, 1971: 689)

Let me now specify the set-up of the case study. The case will be divided into two periods in which

there is a boom in the price of the natural resource which the country exports. The case will be

chosen so that the resource extraction is nationalized in the first period, while being privately

controlled in the second period, with liberal regulation (see figure 3.1.). This maximizes variance on

the independent variable, privatization and liberalization. The outcome in terms of development will

then be observed.

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Figure 3.1.: The methodological set-up of the case study

Period 1: Nationally controlled resource extraction

Period 2: Foreign private resource extraction

The case will be chosen so that the economic dimension of the resource curse is present in period

one. By holding other relevant variables constant we can then observe how the occurrence and

political dynamic of the resource curse might change as the ownership and regulation changes. The

independent variable is therefore the ownership form and regulation, and the dependent variable is

the economic resource curse. This leads the analysis to focus on two questions. Firstly, how does

the occurrence of the resource curse change – if at all – as ownership and regulation is changed?

Secondly, what are the effects of privatization and liberalization on the politic dynamics involved in

the resource curse?

The case study will be of the hypothesis generating kind. This approach is somewhat explorative in

that it seeks to analyze the case in question in order to establish hypotheses that can then later be

tested among a larger number of cases (Lijphart, 1971: 692). It should be clear then that the

ambition of this study is not to try to falsify the resource curse hypothesis through the analysis of a

single case. Rather, the ambition is more limited in that it seeks to reflect on the resource curse

literature through grounded analysis and propose some new, tentative hypotheses. This is in line

with the strengths and limitations of the case study approach. Thus, it has been noted that the

Boom in the price

of natural

resources

Developmental

outcome

Private foreign

ownership /

liberal

regulation

National

ownership /

strict

regulation

Developmental

outcome

Boom in the price

of natural

resources

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strength of the case study approach is its ability to provide “analytical generalization‖, that is

inference to theory, rather than “statistical generalization‖, that is inference from a sample to a

larger population (Yin, 1994: 30), in this case from our single country case to all resource-rich

developing countries. The case is therefore not chosen because it is especially representative of all

resource-rich countries. Rather it is chosen strategically in order to be able to analyze the relevance

of ownership and regulation for the occurrence and political dynamics of the resource curse. Below

I will argue that strategically, the case of Zambia is optimal.

3.2. Why Zambia?

In order to carry out the research design as described above a case with the following characteristics

is needed:

- There needs to be variance in terms of ownership and regulation, from complete national

ownership to complete privatization and liberalization in order to fulfill the ideal of

maximizing variance on the independent variable (King et al., 1994: 140).

- The change in ownership needs to happen at a time so that there are at least two comparable

boom periods, but with clearly different ownership and regulation forms, thereby ensuring

comparability of the two periods (Lijphart, 1971: 686).

- The dynamics of the resource curse needs to have been present during the period of national

ownership. This is essential since we are inferring to the theory of the resource curse. Thus,

the idea is to have a case where we know that the occurrence and political dynamics of the

resource curse has been present and then analyze what happens to both of these when the

ownership form is changed.

- The conflict dimension of the resource curse needs to be controlled for as this is not the

focus of the study. Because there is complex interaction between economic performance and

the level of conflict (Collier, 2008: 27) it is deemed best to choose a country that does not

have conflict in either period. This is in line with the general recommendation of controlling

for relevant third variables (Lijphart, 1971: 686).

- The institutional context needs to be comparable in the two periods, again as a necessary

control for third variables. This is important seeing that the resource curse has increasingly

been found to be dependent on the institutional context.

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

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First, there has been a complete change in ownership form from nationalized to privatized, which

has also been followed by a liberalization of the regulation. Second, the privatization and

liberalization process was initialized in the 1990s, long after the first boom period under national

ownership in the 1960s and 1970s, and was finalized in 2000, just before the second boom period

started in 2003. Third, Zambia is definitely a case where the economic resource curse was present

under nationalized ownership. In fact, Zambia is a textbook example of the resource curse

historically speaking, not only metaphorically, but also literally as it was devoted a whole chapter in

one of the classic textbooks on the curse, which argued that Zambia exhibited all the characteristics

of the economic resource curse (Auty, 1993: 220-240). Fourth, while Zambia is a classic case of the

economic resource curse it has completely avoided the conflicts associated with the resource curse.

Fifth, the institutional context has arguably not altered more between the two periods than what is

acceptable for the purpose of this study. This last point might at first seem contentious for someone

familiar with Zambian history as the country turned from an authoritarian one-party state to a

multiparty democracy in 1991, which of course is a change in the institutional context. Let me

therefore elaborate a bit on this final point below.

While it is true that the regime type changed in Zambia it is still true that institutional quality

remains weak. While there have been some improvements in indicators measuring governance in

Zambia over time, the levels are still very low and far from the OECD-type institutions, which

according to the resource curse literature are needed in order to avoid the curse. Therefore both

periods are equal in the sense that institutional quality is very low. In terms of becoming a

democracy it should be noted that there of course are some overlaps in what is meant by strong

institutions and democracy, e.g. consolidated democracies are more likely to develop the rule of law

and accountability enhancing institutions. But among weakly consolidated democracies, such as

Zambia, there is no empirical support for the claim that they fare better in terms of avoiding the

resource curse. In fact, there is some evidence that they are more prone to experience the resource

curse than authoritarian regimes. Thus, one study finds that resource-rich democracies without

strong checks and balances tend to perform worse than their authoritarian counterparts (Collier &

Hoeffler 2007: 26). If anything then, Zambia‟s overturn from authoritarian regime to weakly

consolidated democracy with concentrated power in the executive and few checks and balances is

likely to exacerbate the dynamics of the resource curse. This potential bias will be kept in mind

during the analysis.

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While I will argue that these institutional changes do not constitute a problem in terms of holding

the institutional environment constant, I will devote this issue additional attention in the analysis so

that any objections to the argument made above might be met in an open matter. This is done in

order to follow the general methodological guide of reporting uncertainty and testing rival

hypotheses (King et al., 1994: 31-33).

The above has been an attempt to specify the overall methodological approach of the study. With

this framework explained, I now turn to the task of operationalizing my central variables and

concepts.

3.3. Operationalizations – connecting theory with data

The research design operates with the following variables that are of central importance:

- National and private ownership

- Privatization and liberalization

- Resource curse

- Boom period

Each of these will be discussed below.

3.3.1. National and private ownership

In specifying what constitutes national and private ownership we can draw on Luong and

Weinthal‟s typology of ownership forms in the extractive industry. According to this, state

ownership can be defined as a situation in which the state holds 51% or more of the shares in the

extractive companies and have full managerial control. Conversely, private ownership is used to

describe a situation in which a private company, domestic or foreign, holds 51% or more of the

shares and have full managerial control (Luong & Weinthal, 2006: 244-245).

3.3.2. Privatization and liberalization

It follows from the above that privatization involves a transfer of more than 51% of the shares and

managerial rights from the state to a private company.

Concerning liberalization of the extractive sector, I take this to refer to reforms of the regulatory

environment surrounding the mines which push regulation in a more corporate-friendly direction.

This involves such issues as weakening environmental and social responsibilities of the company,

and granting lower tax-rates and tax-exemptions.

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3.3.3. The resource curse and development

As stated in the theoretical chapter, I am interested in what can be termed the economic aspect of

the resource curse, not the effects on conflict or regime-type. In the statistical literature, the

economic resource curse has been operationalized as lower than expected growth in GDP.

However, this is not a possibility in a single case study as we have no counterfactual to compare the

growth rate of Zambia to, as this can only be accomplished through statistical tests. Additionally, it

is only a relevant measure in the long run, as it can take many years for the curse effect to have a

substantially negative effect on the growth rate.

Therefore, instead of judging the occurrence of the resource curse on the growth rate, I will judge it

on the causal link that comes before low growth, as specified in the curse literature, namely

macroeconomic mismanagement and state expansion. This has the advantage that it is measurable,

and it can be seen as a fair test of the occurrence of the curse, as the literature on the resource curse

points out how quickly these negative effects happen, long before they can be registered in the

growth rates (Auty 1993; Karl, 1997).

Drawing on the theoretical chapter, the causal link in the curse literature during the boom period

can be specified as (Karl 1997: 25-27):

- A sharp increase in public spending and investment

- Rising inflation

- Budget deficits

- Debt

All of these separate factors will be compared between the first and second boom in order to assess

whether the economic resource curse is reappearing in Zambia after privatization and liberalization

of the sector.

3.3.4. Specifying the boom periods

It needs to be clarified what is meant by a boom period in order to structure the analysis. I take a

boom to be a period of time in which the price of the natural resource is well above the average

long-term price. Using this definition the two boom periods in Zambia can be specified by looking

to figure 4.1 that shows the annual copper prices.

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Figure 3.2.: Average Annual Copper Prices, 1960-2008 (US$ per ton)

Source: International Copper Study Group, 2009: 64.

The average price for a ton of copper was $3560 for the 20th

century (Adam & Simpasa, 2009: 28).

Looking at the price in constant 2000 $ (marked by the two circles) on figure 4.1. it is clear that

there have been two periods in post-independence Zambia where prices have been well above this

average for a sustained period, namely from the early 1960s until 1974, and again from 2003 and

onwards. These constitute the two boom periods used in the analysis5.

3.4. Summing up on the methodological approach

The methodological approach taken in this thesis will be a comparative, single-case study of

Zambia. By dividing the case into two separate time periods the effects of privatization and

liberalization of the extractive industry can be analyzed. Zambia is chosen as the case to be

5 Some have argued that the boom starting in 2003 ended with the financial crisis in 2008, which brought about a

collapse in copper prices (Adam & Simpasa 2009: 28). However, as time has passed prices have rebound and have now

surpassed an all-time high of 10.000 USD/ton (InfoMine, 2011), and hence the boom period used here includes 2009-

2010.

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analyzed due to the country‟s specific characteristics, which is optimal in terms of maximizing

variance, ensuring comparability over time, and controlling for third variables. The case study

approach will hopefully have the advantage of being sensitive to the causal mechanisms involved in

the resource curse, and how they change after privatization and liberalization has been carried out.

It is the aim to generate hypothesis from the case study for further empirical investigation.

Having specified the theoretical and methodological approach of this thesis we can now turn to the

task of analyzing the research question. This will be done in the next chapter, the analysis.

4. ANALYSIS: COPPER BOOMS IN ZAMBIA THEN AND NOW -

THE ROLE OF PRIVATIZATION AND LIBERALIZATION

Drawing on the methodological and theoretical sections, the following will present the analysis of

Zambia. As will be remembered, the research question seeks to investigate both the occurrence and

political dynamic of the curse after privatization and liberalization. The analysis will turn to the

question of the occurrence of the curse in the first part, through an analysis of economic

management in the two booms. In the second part of the analysis the political dynamic before and

after privatization will then be analyzed.

4.1. Comparing the economic management of the two booms

In the following, I will analyze the effects of the two boom periods, focusing on whether the

resource curse phenomenon occurs under both nationalized and privatized and liberalized

conditions.

4.1.1. Boom 1: Nationalization, state-led industrialization and economic decline

At independence in Zambia in 1964 there was an “expectation of modernity‖ (Ferguson, 1999).

This expectation was not unfounded. Zambia enjoyed a GDP per capita at independence that was

three times higher than Kenya‟s, and even outperformed such countries as Turkey, Brazil, Malaysia

and South Korea in terms of GDP per capita (ibid.: 6).

Copper prices were very strong during the early independence years, and as all mineral rights were

transferred to the state from its former owner, the British South African Company in 1964, it was

hoped that this sector could contribute to the development of the country (Saasa, 1987: 26). The

copper sector paid approximately 73% of its profits in taxes to the state, a tax rate that was

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relatively high by international standards (ibid.: 26-27). This tax system provided the state with

approximately 50-60% of its total revenue in the first five years after independence (Obidegwu &

Nziramasanga, 1981: 15).

This massive revenue windfall formed the base for a new ambitious development strategy. As noted

in the government‟s First National Development Plan:

―…the capital investment available to Government… is determined almost entirely

by revenue obtained from copper‖ (quoted in Shafer, 1994: 50)

The development strategy chosen was import substitution industrialization (ISI) (Gulhati & Sekhar,

1981: 7). Further components of the strategy were nationalization of key sectors, including mining,

and the introduction of price controls on key commodities (Kayizzi-Mugerwa, 1988: 19). Taken

together, the strategy was highly state-driven.

The goal of nationalization was first proclaimed by the government in 1968 in the so-called

Mulungushi declaration, whereby 26 companies where nationalized (Saasa, 1987: 34). This did

not yet include the big mining companies, but was part of the increase in state-participation in the

economy, funded by mining revenue. In 1969 the so-called Matero declaration followed,

extending the nationalizations to the mining sector, with the state acquiring a 51% shareholding in

the mining companies (ibid.: 37). In 1973 the government, increasingly unsatisfied with the lack of

re-investment of profits by the mining companies, decided to take full administrative control of the

mining sector (ibid.: 41).

The Mulungushi and Matero declarations completely altered the Zambian economy. As shown in

table 4.1., parastatals became the bedrock of the Zambian economy.

Table 4.1.: Parastatals share of the Zambian economy (in percent), 1968-1972

1968 1969 1970 1971 1972

Share in employment 14 12 17 36 37

Share in gross output 10 17 27 46 45

Source: Gulhati & Sekhar, 1981: 25

Furthermore, as table 4.2. demonstrates, the source of capital investments shifted from private to

public funds after independence.

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Table 4.2.: Total capital investment in Zambia, 1954-1970

1954-64 1966-70

£m % £m %

Public sector 180.4 42.3 281.8 65.7

Private sector 245.7 57.7 147.5 34.3

Total 426.1 100.0 429.3 100.0

Annual average 42.6 - 107.3 -

Source: Saasa, 1987: 31

Even though mining revenue was flowing into the state coffers, the rapid expansion of state-led

industrialization caused a permanent budget deficit equivalent to 5.2% of GDP in the period of

1970-74 (Auty, 1993: 222). Attempts were made to broaden the tax base, but proved to be too

modest to cover the deficit even during the times of high copper prices (ibid.: 221-222). Thus,

personal taxation was low throughout period 1, as would be expected from the resource curse

literature.

At the same time, the ISI strategy proved to be unsustainable. Initially, annual growth in

manufacturing in the period 1964-1973 stood at an impressive 9.6% (Gulhati & Sekhar, 1981: 15).

Estimates have shown that as much as 55% of the growth in manufacturing in 1965-72 can be

attributed to ISI (ibid.: 17). However, the ISI strategy favored capital intensive projects in a country

whose comparative advantage was relatively low wages and agriculture, and as a result the

expansion in industry did not become internationally competitive (Kayizzi-Mugerwa, 1988: 21-22).

Instead of diversification, the economy became increasingly reliant on the natural resource sector

over time (ibid.).

To compound this problem, the boom in the copper sector provided a strong upwards pressure on

wages that spread to the whole of the economy (ibid.). From the mid-sixties to mid-seventies the

wages in the manufacturing sector rose rapidly, and in the mid-seventies were twice the level of

South Korea, and more than three times that of India (Gulhati & Sekhar, 1981: 31).

In part to counter the wage pressure, extensive price controls were introduced on basic food items

such as maize and beef. The prize of maize, the stable food of Zambia, was held constant in the

period from 1964-74 despite a shortage in 1970-72. In real terms, the prices fell, and as a result

imports of agriculture products soared, and domestic production fell (Obidegwu & Nziramasanga,

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1981: 141-142). Although not initially expensive, by 1980 the policy of price control took up 19%

of total government expenditures (Kayizzi-Mugerwa, 1988: 19-20).

Meanwhile, the mining sector slowly deteriorated as too little of the windfall was reinvested. The

government‟s policy of extracting rents from the sector contributed to this problem (Meller &

Simpasa, 2010: 45-46). Production costs rose as a result and Zambia lost market shares over time to

other emerging copper producers. The rise in the cost of production can only to some degree be

explained by worsening geological conditions and has instead been blamed on government

interference in the sector (Adam & Simpasa, 2009: 13-14).

The politicization of the mining sector also meant that the mining company‟s mandate was

expanded to provide extensive welfare services to their employees (Adam & Simpasa, 2009: 13-

14), which became a drain on the mines and state (Kayizzi-Mugerwa, 1988: 10).

In 1974 the price of copper plummeted and the economic problems rose exponentially. Almost

overnight the sector‟s contribution to government revenue fell from 60 percent to none:

‖The mineral sector‘s role as the main generator of government revenue had, for all

practical purposes, ceased by 1975‖ (Kayizzi-Mugerwa, 1988: 30)

The high levels of government investment that protected local industry, kept food prices low and

provided welfare to urban groups proved difficult to scale back as revenue collapsed. Instead, debt

increased at an alarming rate, rising to well over 100% of GNI in the 1980s. At the same time, the

annual growth in manufacturing in the period of 1974-77 was -4.9% (Gulhati & Sekhar, 1981: 15).

Growth in GDP collapsed, inflation rose and the economy entered a period of almost thirty years of

decline, eventually transforming it from one of sub-Saharan Africa‟s richest countries to one of its

poorest. So exceptionally bad was the performance of the Zambia‟s development that it is the only

sub-Saharan African country to have experienced a decline in the UN‟s influential Human

Development Index (HDI) from independence to present day (UNDP, 2010: 8).

It is important to stress that the economic problems were not solely a result of the declining copper

prices. Rather, it should be clear from the above that the seeds to the economic decline were sown

during the boom period, an assessment shared by others (Meller & Simpasa, 2010: 47; Auty, 1993:

223; Shafer, 1994: 64-65).

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Overall, one could not imagine a better fit between the theory of the resource curse and the actual

management of the boom in Zambia during this period. To see whether this is also the case during

the boom occurring since 2003 I now turn my attention to period two.

4.1.2. Boom 2: Privatization, liberalization and macroeconomic stability

While the current boom has been comparable in size to the one occurring in the 1960s-1970s the

trajectory of the Zambian economy has been quite different:

―…the government‘s handling of the boom [of 2003 and onwards] was exemplary...

the government appeared to approach the issue with caution and avoided repeating

the mistakes of the 1970s.‖ (Meller & Simpasa, 2010: 84)

The boom has not led to a massive state expansion this time around. In fact, government‟s share of

real GDP has fallen during the boom. Additionally, there have been no new attempts at ISI nor have

price controls been utilized.

In terms of the core macroeconomic indicators, the Zambian economy has only seen improvements

during the boom. Contrary to expectations, both debt and inflation has been brought down. The

most recent IMF assessment of the economy thus paints a positive image of the macroeconomic

performance:

―Economic performance continues to be strong ... Inflation is subdued; the current

account deficit has narrowed; international reserves have remained solid; and the

economic outlook is positive with continued strong growth. Zambia‘s risk of debt

distress remains low‖ (IMF, 2010: 12)

It has to be kept in mind that this assessment follows 8 years of extraordinary high copper prices

and therefore cannot be explained by short-term improvements in the macroeconomic brought about

by the windfall. The macroeconomic improvements seem to be permanent and there are no signs of

erosion over time, quite the contrary.

The mining sector itself is also performing better during the current boom. Whereas the sector in

1970s came to be marred by underinvestment, the mining sector has been expanding rapidly during

the second boom with new investments being made and new mines opening (Stürmer & Buchholz,

2009: 63). Thus, Zambia has seen its global market share in the copper sector rise substantially,

albeit from a low level (Adam & Simpasa, 2009: 29).

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During the current boom government expenditure policy has been markedly more conservative than

in the first period. There has been a de-coupling of copper prices and government expenditure:

―…since 2004 has Zambian fiscal policy attitude changed to establish government

expenditure independently of the behavior of copper prices.‖ (Meller & Simpasa,

2010: 64)

This can be attributed to the fact that the government‟s share in the enormous windfall in the mining

sector has been minimal. Whereas the boom in 1960s-70s brought mining revenue up to as much as

60% of total government revenue, the current boom has not exceeded 4% of fiscal revenue. The

modesty of the fiscal impact of the current boom is reflected in figure 4.2., showing the

development in revenue from the mining sector over time.

Figure 4.2.: Fiscal revenue from mining, 1980-2008

Source: Meller & Simpasa, 2010: 72

The government accrued approximately the same amount of revenue from the mining sector in the

mid-nineties as in 2008. This despite the fact that the price of copper was hovering at around $3000

per ton in the mid-nineties, whereas it surpassed $9000 per ton in 2008. Equally, whereas the sector

produced around 300,000 tons of copper per year in the 1990s, this had surpassed 600,000 in 2008

(Simutanyi, 2008: 4-5). To further understand the scarcity of tax revenue from the boom one can

use 2005 as an example. In this year, the copper sector sold minerals at a value of $1.17 billion. The

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tax take from this enormous figure was a miniscule $11 million (Stürmer, 2010: 7). Calculations of

the so-called Implicit Tax Rate (ITR) show that Zambia‟s tax take in the period of 2003-2008 was

below 2%6 (ibid.).

The explanation of the limited impact on revenue from the current boom should be found in the

regulation surrounding the mining sector. Thus, Zambia underwent one of the most ambitious

privatization efforts ever seen in the early 1990s. This not only meant a restructuring of the

economy from state ownership to private ownership, but also brought about the elimination of trade

barriers, subsidies, and the introduction of a floating exchange rate (Craig, 2000: 358).

Between 1992 and 2000, 113 out of 140 state-owned enterprises were privatized (ibid.). The mines

were no exception to this trend. In 1995 a new Mineral Act was passed by Parliament which led to

the possibility of privatization. During 1997-2000 the mines were all sold to foreign investors

(Lungu, 2008: 7). The Mineral Act of 1995 had laid out the overall fiscal conditions for mining

sector, including a 3% royalty rate. However, the Act also specified that investors could negotiate

the specific conditions with the government. And negotiate they did. Through so-called

Development Agreements (DA) the investors and government arrived at an extremely low tax rate,

with the royalty rate being set at 0.6% for most investors, and with generous tax incentives.

It would seem then that the regulatory environment surrounding the mining sector, and the overall

development strategy has changed so fundamentally during the first and second boom that the

effects of the windfall has itself changed dramatically. Thus, the standard resource curse narrative

does not seem as relevant in describing Zambia‟s current boom period as it was in the first period.

Macroeconomic indicators such as debt and inflation have seen improvements rather than

deterioration during the current boom, as shown in table 4.3 below. And none of the three

explanations for why the curse emerges, presented in the theoretical section, have been a feature

during the second boom. Firstly, the neo-patrimonial spending patterns have not reemerged as the

tax-take from the copper sector has been low. Secondly, the low tax revenue has also meant that the

state has not repeated the costly state-led industrialization policies. Lastly, as the copper sector is

not contributing much to state revenue, personal taxation has been increased markedly during the

6 The ITR is calculated as the ratio between sales revenue from minerals and the tax revenue collected from this sale, in

the form of corporate income tax and royalties (Stürmer, 2010: 1). To put Zambia‟s ITR of under 2% into perspective, it

can be noted that Australia has an ITR of approximately 9% on its extractive sector (ibid.).

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second boom (Weeks & McKinley, 2006: 15)7. On all accounts then, the current boom in Zambia

does not conform to the theoretical expectations presented in the contemporary resource curse

literature. Furthermore, it should be clear that these improvements are closely linked to the sharp

reduction in state revenue from the copper sector, brought about by privatization and liberalization.

Table 4.3.: Key macroeconomic indicators, Zambia 1965-2009

Period 1 Period 2

Item

(annual

average for

the period) /

Years

1965-69 70-74 75-79 80-84 85-89 90-94 95-99 00-04 05-09

External

debt stock

(% of GNI)

N/A 49 89 112 273 226 211 171 38

Government

share of

Real GDP

per Capita,

current

prices

8,3 15,1 22,3 26 17,6 21,9 17 12,6 12,3

Inflation,

GDP

deflator

(annual %)

14.7 3.1 8.8 12.4 60.1 114.7 25.6 22.8 13.2

GDP

growth

(annual %)

4.0 3.9 -0.6 0.8 2.1 -0.8 1.6 4.5 5.9

7 In 1990, revenue from company taxation was approximately 6 percent of GDP, while personal taxation stood at

approximately 1.5 percent of GDP. In contrast, in 2004 company taxation only provided 1 percent of GDP, with

personal taxation providing 7 percent, making it the most important source of tax revenue for the government (Weeks &

McKinley, 2006: 15).

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Government

revenue

from copper

exports (%

of total

government

revenue)

61.4 39 2.68 2.65 8 1.6 4.5 4.8* 1.4

Sources: Saasa, 1987: 9; Kayizzi-Mugerwa, 1988: 29; Meller & Simpasa, 2010: 72; World Bank,

2010a

* The average for this period is driven up the large revenue generated from privatization of the

mines, providing 11-13 percent of government revenue in 2000 and 2001. In 2002, 2003 and 2004

mining revenue was all less than 0.5 percent per year.

4.1.3. The sustainability of the current model

Above it was shown that none of the negative effects from the first boom seem to be repeated under

the new ownership and regulatory environment. This raises the question of whether the current

model is more sustainable in terms of development. Here I take sustainable development to mean:

―…development that meets the needs of the present without compromising the ability

of future generations to meet their own needs‖ (Ruud, 2006: 137)

Two questions arise from this definition. Firstly, does the current development ensure to a sufficient

degree that the needs of the Zambian population are met? Secondly, does the development model

ensure that the long-term development of Zambia is ensured? I will argue that on both counts the

neoliberal development model in Zambia during the second boom fails.

Firstly, in terms of impacting the fulfillment of basic needs of the population the model is flawed.

The copper sector, as with most extractive industries, is an enclave economy with few linkages to

the rest of the economy. Statistical tests confirm this as they have shown that Foreign Direct

Investments (FDI) in the extractive sector have no positive spill-over effects for the rest of the

economy (Alfaro, 2003: 9-11). This is a consequence of the high capital intensity and technological

sophistication of mining. Investments in the sector is primarily spent on capital rather than

employment of local labor, and due to the technological sophistication of the capital needed, there

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are few local Zambian firms that function as providers of inputs for the sector (Saasa, 1987: 10-11;

Adam & Simpasa, 2009: 4).

Although the sector is the second largest provider of formal employment in Zambia, only surpassed

by the state, the total number of employees stood at approximately 32,000 in 2006 (Simutanyi,

2008: 7). This is not an insignificant amount, but as the World Bank notes in a study on Zambia, it

is not sufficiently high to have a high impact on poverty levels (World Bank, 2008: 25).

In order for the sector to contribute to the welfare of the population a strong argument can therefore

be made for the centrality of taxation (Adam & Simpasa, 2009: 4). However, by reducing the

taxation dramatically through the privatization and liberalization process this key feature of the

sector has been diminished, thereby making it even more of an enclave (Breisinger & Thurlow,

2008: 8).

While the mines have experienced extraordinary profits during the upswing in copper prices,

Zambian society has thus not gained much. The re-investment of profits from the copper could

potentially have been a great development push, but instead the profits were expatriated to the

multinational corporations that controlled the sector:

―Undoubtedly, this resource windfall [from the boom until 2008] was the biggest

opportunity for Zambia‘s transformative development. However, given the ownership

structure of the mines, a substantial share of the windfall income accrued to the

foreign private owners of the Zambian mines. Given the tilted tax regime, a

substantial proportion of the measured foreign asset accumulation was in fact

repatriated as profits and payment of dividends by Zambian-based mining houses to

their foreign shareholders. This amount was estimated to be about 75 % of total net

capital outflows.‖ (Meller & Simpasa, 2010: 71)

Had Zambia taxed their extractive sector at the same rate as Australia, the country would have

earned an additional $1.4 billion in tax revenue in the period of 2003-2008. This is equivalent to

21% of official development assistance to Zambia during the period (Stürmer, 2010: 9). To put this

in relation to the fulfillment of the basic needs of Zambians, one can compare this figure to the costs

of meeting the Millennium Development Goals (MDGs) in Zambia. It has been estimated that there

is a financing gap in Zambia of approximately $6.2 billion for the period 2008-2015 if the MDGs

are to be meet (Stürmer & Buchholz, 2009: 68). This means that 23% of the funds missing to

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finance the MDGs could have come from the mining boom during 2003-2008. Additionally,

assuming that high copper prices continue until 2015 and the production was taxed more

aggressively than is now practice, the copper sector is estimated to be able to fill the financing gap

and more (ibid.: 69).

Taken together, it would seem that although Zambia has achieved growth, it has not achieved

sustainable development in the first sense of the word, namely that of meeting the population‟s

needs. However, there is of course an obvious objection to this: Would a higher tax rate not lead to

the negative outcomes described in the resource curse literature and found in Zambia during the

first boom? Of course this risk exists. There is no guarantee that collecting more taxes from the

mining sector would have provided better development results. But I will argue that while this is a

danger, the alternative of preserving the status quo is not a sustainable option. To expand on the

latter argument I now turn to the second aspect of sustainable development, namely that of ensuring

the welfare of future generations.

In terms of not compromising the potential to meet future generation‟s needs, the situation is also

problematic. Here, there are three issues worth commenting on: Externalities, subsidies, and mineral

depletion.

The extractive sector is known to produce high costs in terms of negative externalities. These are

most prominently in the form of pollution and wear and tear on infrastructure. An indication of the

costs being passed on from the mines can be seen from the Copperbelt Environmental Project

(CEP) which seeks to clean up hazardous waste in copper mining areas. The project among other

things focuses on removing poisonous lead from Kabwe town, where 5,000 people have been

infected with lead poisoning due to its proximity to the mines. The cost of the project is so far 50

million USD (Reuters 2007). These costs are covered by the Zambian public and donors, rather than

the mines that are responsible for producing the costs. That environmental degradation is a problem

in Zambia is clear from the Environmental Performance Index produced by researchers at Columbia

University. Zambia ranks as one of the most polluted countries, at number 130 out of 149 on the

index, with almost all of the low-scoring countries being heavily dependent on the extractive

industry (EPI 2010). In economic theory, taxation is one way to off-set the cost to society through

pollution and other negative externalities. However, so far it seems the state is covering the

expenses without much compensation.

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In terms of subsidies it should be pointed out that in addition to the generous tax breaks that the

mines have negotiated, they are also granted more indirect support. For example in the form of state

and donor funded infrastructure. This also includes electricity for which the mines consume more

than 50% of the national supply. Production of electricity is one of the few things in Zambia that is

still the responsibility of the state. The mines only pay approximately 25% of the cost that other

consumers pay for their consumption of electricity as part of an indirect state subsidy for the sector

(Mpande, 2009; Stürmer & Buchholz, 2009: 63-64). Countering in subsidies and tax incentives, one

author finds that the mining sectors contribution to the state coffers is negative (Mpande, 2009).

Lastly, it is important to stress that minerals are a non-renewable resource. Mining is different in

this respect than say textile production. Because mineral reserves will eventually run out it is clear

that the key is to make sure that the wealth that accrues from mining is used to secure long-term

sustainability. As a result, the use of GDP growth as the appropriate measure of economic success

in countries that are highly dependent on extractive industries has been criticized (Ley, 2010). Ley

argues that one needs to measure progress on the so-called adjusted savings rate. The way in which

the adjusted savings rate is calculated, and the results of this exercise are reflected in table 4.4.

Table 4.4.: Adjusted net savings for Zambia, 2001-2007 (all figures are percentage of GNI)

Source: Ley, 2010: 11

As can be seen from the estimates, Zambia has been suffering from negative adjusted savings for

most of the current boom period. This reflects that national wealth is not being upheld over time. In

essence, costs are being transferred to future generations.

Taken together, the development model that has been in place during the current boom seems

unsustainable. The country is not realizing the potential to meet its population‟s needs, neither now

nor in the future. Rather, it would seem that Zambia is being drained of wealth without

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compensation in order to sustain development. In the worst case, the mining boom of the 2000s will

have cost the Zambian state more than it has brought the country.

4.1.4. Summing up: The economic analysis

This first part of the analysis has focused on the occurrence of the resource curse during the two

booms in Zambia. It has shown that while the curse did occur under national ownership and strict

regulation, it did not reemerge after privatization and liberalization, as macroeconomic stability and

no state expansion could be observed.

While the curse has not re-emerged, it was argued that current boom is not sustainable in terms of

development. The second boom has been characterized by foreign Multinational Corporations

(MNCs) siphoning wealth out of the country with little or even negative impact on current and

future generations.

Having reached this first tentative conclusion, I now turn to the second part of the analysis which

seeks to compare the political dynamics during the two booms.

4.2. Political analysis: The dynamics of the curse under national and

private ownership

The above analysis highlighted that the two booms occurring in modern Zambian history have been

managed very differently by the state. The first was handled exactly as the literature on the resource

curse would predict, creating a massive unsustainable state expansion and macroeconomic

imbalances. The second boom, however, presents the resource curse literature with a host of

puzzles.

Firstly, the curse literature assumes that politicians will want to capture and redistribute rents from

the extractive sector in order to stay in power, as well as the population demanding such

redistributive policies. How does one then explain that politicians in Zambia have seemingly

accepted a minimal tax-take from the copper sector during the current boom?

Secondly, if a boom of the magnitude seen in the 2000s is theoretically expected to be a perfect

storm for politicians creating macroeconomic imbalances, then why has macroeconomic policy

improved during the present boom?

In essence, how could two comparable booms in the same country, under condition of weak

governance produce such different results?

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These questions lie at the heart of the following analysis. In line with the theoretical section, the

approach to answering these questions will focus on the political dynamics between crucial actors,

and the coalitions they form. In line with the methodological section, the approach taken will be

comparative. Thus, in order to understand the puzzle of today‟s boom it is argued that we need to

understand the politics of the previous boom. Let me therefore begin by analyzing the political

dynamic during the first boom, which will then be compared with the dynamic during the current

boom in the last part of the analysis.

4.3. The political dynamic during the first boom

―We were born, unfortunately, with a copper spoon in our mouths‖

- First President of independent Zambia, Kenneth Kaunda (quoted in Simutanyi, 2008: 4)

As Zambia was granted independence in 1964, one party came to dominate politics, namely the

United National Independence Party (UNIP). The task UNIP faced at independence was a daunting

one: To build a nation-state and promote development. As was apparent from the analysis of the

economic management of the first boom, nationalization of the mines played a key role in the new

government‟s strategy to obtain these goals. As we know from the previous sections, things went

terribly wrong for Zambia in this period.

In the following I will explore why things went so wrong, going beyond the usual focus on

institutions as the prime cause. Instead I will focus on the effects that nationalization had on the

coalitions that emerged during the boom among the political actors in Zambia.

4.3.1. Nationalization and its effects on development coalitions

Colonialism left Zambia with a highly centralized state. Before leaving, the British did try to set up

a system of parliamentary rule, but UNIP changed the constitution upon taking over power in 1964

and instituted a presidential system (Phiri, 2006: 231). The form of leadership was highly

centralized with almost all the power vested in the executive, a system of governance that continues

in Zambia to this day. The concentration of power in the state was partly a consequence of the

highly nationalist ideology that dominated Zambia at independence.

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Nationalism was an expectable reaction to the subordination of Zambians during colonial rule8.

However, UNIP was also quick to exploit the nationalist agenda to secure their own continued rule.

Thus, UNIP increasingly equated the state with the UNIP, and demanded unconditional loyalty, as

evident in President Kaunda‟s rhetoric:

―We must forget our individualism and put the Nation first before us. The party is

supreme.‖ (quoted in Macola, 2008: 23)

However, almost immediately after independence it became clear that UNIP was not “supreme‖.

Regional and tribal cleavages were stronger than the nationalist ideology and dissatisfaction and

oppositional voices to UNIP became a feature of the early post-independence years (Phiri, 2006:

134). UNIP was under immense pressure to fulfill the population‟s ―expectations of modernity‖

(Ferguson, 1999), for which the UNIP had helped inflate beyond what was achievable9.

The solution that UNIP chose in order to manage opposition and hold together the fragmenting

country was a combination of suppression, neo-patrimonialism, and state-led industrialization. As

documented in the economic analysis, all of this was made possible only with the use of revenue

from the copper sector. In order to secure that the state-led industrialization could succeed, an

efficient bureaucracy was needed to implement the policies.

However, during the first boom the bureaucracy was not in a state to manage the technically

demanding task involved in directing the economy. Firstly, the bureaucracy was extremely weak at

independence. During colonial times, Africans held a marginal number of the middle and higher-

level positions in the bureaucracy. Out of the 1,298 senior appointments in the bureaucracy only 39

were held by Africans (Shafer, 1994: 66). When the British left, the bureaucracy was deprived

many of its skilled staff. The low level of training and experience in the bureaucracy persisted for

years (Shafer, 1994: 66).

Second, the bureaucracy quickly became politicized. Due to the overriding need to build a

strong support base for the new government, UNIP increasingly came to see the civil

8 See Phiri, 2006 for an analysis of how populist nationalism came to dominate over multi-cultural liberalism in

Zambia.

9 For example, Kaunda had at a political rally in January 1964 promised that there should be ―eggs and milk for every

child and for every family in Zambia by 1970‖ (quoted in Phiri, 2006: 135).

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service as an extended arm of the party. President Kaunda openly acknowledged this in a

public speech given after the 1968 election when the opposition challenged UNIP:

―I cannot see how I can continue to pay a police officer or a civil servant who works

for Nkumbula [the opposition leader]… How dare they bite the hand that feeds

them? They must learn that it pays to belong to UNIP. Those who want to form a

civil service of the opposition must cross the floor and get their pay from Harry

Nkumbula.‖ (quoted in Phiri, 2006: 141)

As part of the politicization of the bureaucracy, hiring also became part of a network of patronage.

Between 1964 and 1969 the number of public employed rose from 22,500 to 51,000, making the

state one of the most important employers in the country (Rakner, 2003: 45). The politization and

low level of skilled staff in the bureaucracy meant that it could not be relied on as an effective

vehicle to guide the economy.

Thus, during the first boom the state was at one and the same time both strong and weak. It was

strong in the sense that power was concentrated in the executive, and due to the seemingly endless

supply of revenue from mining it became the central actor in politics and the economy. However, it

was weak in the sense that the state‟s ability to implement policies was compromised by a weak and

inefficient bureaucracy.

The state‟s dominance was partly made possible by the fact that the local business sector was

almost non-existent at independence. This also meant that the potentially beneficial government-

business relationships never were realized in the first period. Apart from the mining sector, the two

largest earners of foreign exchanges were the maize and tobacco sector. The tobacco sector was

highly ineffective and only managed to uphold exports due to subsidies. The maize production was

highly volatile with Zambia being a net-importer of maize in some years due to drought (Obidegwu

, 1981: 14). The relationship to the sparse local business community that did exist at independence

was furthermore complicated by the dominance of non-Africans within this community. The

Mulungushi reforms that was the first step towards nationalization of the economy was not only

part of the ISI developmental ideas, it was also an attempt to eradicate past racial inequalities

(Macmillan, 2006: 190).

As the nationalization of the economy was carried out, the relationship between the state and the

local business sector became filled with tension and ‖nervousness‖ in the business community

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(ibid.: 198). The reforms targeted business, in some instances even eliminating some sectors of

business in order to make it easier for a black entrepreneurial class to emerge (ibid.). The reforms

also minimized the business sector‟s possibilities for influencing state policies (Rakner, 2003: 47).

Following the recession after 1975 and the massive decline in manufacturing that followed, the goal

of establishing a black entrepreneurial class was a dream that was not to be fulfilled. State-business

relations thus never came to be a determining factor in the first boom period.

The local business sector was not the only actor without any political influence in these early years.

The donors were also sidelined by the state‟s easy access to mining revenue, and later to loans. It

was not until the 1980s that donors, especially the IMF, came to be an influential actor (Rakner,

2003: 54). Therefore, the first boom period was not shaped by the interests of donors, which

facilitated the nationalistic agenda of the UNIP.

While the local business sector and donors were unimportant allies for the government there were

other actors on the political scene that could not be ignored by the government. Perhaps most

importantly was the urban areas were the trade unions, especially within mining, were strong. This

study shares the following assessment of the strength of the unions during the crucial years under

the first boom:

‖ZCTU[the Zambian Congress of Trade Unions] was the most powerful non-state

association in Zambia throughout the First and Second Republics [1964-1991]‖

(Rakner, 2003: 51)

For the new UNIP government the mining unions were seen as an obstacle to achieve their vision of

a modern diversified economy, and there is little doubt that control over the mining unions was

essential in these early independence years (Bates, 1971: 1).

Unlike the opposition, UNIP could not suppress the unions. Instead, the state sought to co-opt the

unions throughout the period, which proved unsuccessful (Larmer, 2005: 321). In 1965,

immediately after independence, the government sought to bring the unions under their control by

setting up the Zambian Congress of Trade Unions (ZCTU) as an umbrella organization for all

unions in Zambia. Additionally, the members‟ ability to take legal industrial action was severely

restricted (Larmer, 2006a: 157). UNIP sought to capture ZCTU by bringing forth hand-picked

candidates for internal elections in ZCTU. In defiance, the union members strongly rejected the

UNIP candidates (ibid.). In realization of the importance of controlling the union members of the

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mining sector the state furthermore set up the Mineworkers Union of Zambia (MUZ) in 1967 (ibid.:

158). Here, the government had more luck in hand-picking the leadership of the union, but never

secured the support of the rank-and-file members (ibid.). In 1971 the government introduced a new

Industrial Relations Act (IRA) that de-facto made it illegal to strike, and furthered the power of

ZCTU over its member unions (ibid.: 159). These legislative attempts at weakening the unions did

not succeed. In fact, it has been suggested that the movement‟s political influence was strengthened

by the government‟s policy of putting all unions under the control of ZCTU (Rakner, 2003: 50-51).

The influence of the unions was visible throughout the period. Already in 1966, two years after

independence, the mining unions staged strikes to claim better conditions and wages (Rakner, 2003:

50). As noted in the economic overview of the first boom period, the demands for better wages

were met to some degree which sparked an upwards wage pressure for the rest of the economy. It is

against this light that the introduction of food subsidies should be seen, as these were deployed as a

tool to contain further upwards pressures.

Furthermore, the strength of the unions should also be viewed as part of the rationale for

nationalizing the mines. Having failed in controlling the miners through the unions the government

saw the nationalization as a means of gaining more control over industrial relations in the copper

sector (Larmer, 2006b: 300). The miners themselves were against nationalization for this very

reason (Larmer, 2006a: 158-159). Once nationalized, the government sought to appease the unions

by putting in place a separate welfare system for the communities surrounding the mines (Fraser &

Lungu, 2007: 7). The unions themselves played an active role in demanding these policies (ibid.).

It would seem that the government had opted for nationalization in order to control the mining

unions, and the unions in return demanded special treatment in order to accept this model. This

coalition between the unions and the state, with the latter given the former special treatment has led

some to term the Zambian miners “a labour aristrocracy‖ (Kayizzi-Mugerwa, 1988: 14). This label

is, however, a bit misleading since the unions never functioned as a support base for UNIP (Larmer,

2005). Instead they were perhaps the strongest opponent of UNIP‟s policies and were instrumental

in bringing an end to the one-party state (Akwetey & Kraus, 2007; Larmer, 2006a & 2006b).

However, it is true in the sense that the state was preoccupied throughout the period with keeping

the rural areas and the unions content.

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The UNIP government, however, never succeeded in gaining the confidence of the miners. This led

the government to fear the unions. When vice-president in the UNIP government, Simon

Kapwepwe decided to leave the government and form his own political party in 1971, UNIP was

concerned. When his new party won in a significant mining constituency in the 1972 by-elections,

UNIP was horrified. Fearing electoral defeat in open elections due to the loss of the mining

constituency, UNIP declared the new political model of ―one-party participatory democracy‖, a

thinly veiled euphemism for authoritarian rule where opposition parties were banned (Phiri, 2006:

159pp.). The conflicts between UNIP and the mining constituencies were a strong determinant in

Zambian politics throughout the first boom and created a strong pressure on the government to

make sure that the mining sector was strong and provided benefits to the workers. It was partly this

pressure that explains the neo-patrimonial distribution of rents from the mining sector and the

following economic mismanagement. It was also this dynamic that ensured that mining interests

were strong throughout the first boom period, making diversification less likely.

Another equally powerful actor in the period that ensured the dominance of mining interests was the

mining MNCs. The mining MNCs had enjoyed a protected status during the colonial

administration. Enfranchisement was stalled due to the fear that the mining companies would flee

the country (Phiri, 2006: 21). As independence was approaching in the late 1950s the mining MNCs

put their investments on hold, fearing that nationalization was imminent (Obidegwu &

Nziramasanga, 1981: 9).

This problem intensified after independence. In 1961 – before independence - 50 percent

of the earnings in the sector were paid out as dividends to share-holders, while the rest was

re-invested. In contrast, during the period after independence an average of 94 percent of

the earnings were paid out to the share-holders, reflecting investors‟ fears of a government

take-over of the mines (Obidegwu & Nziramasanga, 1981: 4).

The conflict between the mines and the government put in place a self-reinforcing political

dynamic that eventually led to nationalization due to the government‟s dissatisfaction with

lack of investments. Nationalization ended the mines managerial control, and politicization

soon followed as the demands from the miners‟ union became more difficult to manage.

The nationalized mines also became infested with corrupt ties to the government

(Simutanyi, 2008: 2). The overall effect was the decline of investments and subsequent rise

in production costs in the copper sector, as described in the economic analysis.

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However, the mining MNCs were not powerless against the Zambian state, and used their

considerable influence to ensure that their interests were seen to. For example, in 1970 the mining

MNCs managed to secure a deal with the government which meant that any loans they made abroad

was to be backed by the government (Obidegwu & Nziramasanga, 1981: 18). In 1978 the mining

MNCs share of the foreign debt was 19 percent (Saasa, 1987: 57). Furthermore, while the tax take

from the mines was initially were high, as documented in the economic analysis, the mines were

successful in negotiating lower tax rates throughout the period (ibid.: 34-36). The consequence was

once again that mining interests were catered to, at the expense of development. The mines had

used their power to ensure that Zambia would continue to be a mining nation first and foremost.

4.3.2. Summing up: The political dynamic of the first boom period

The analysis of the first boom conforms well to the resource curse literature in several regards. All

three explanations put forward in the contemporary resource curse were factors during the first

boom. Neo-patrimonial redistributive policies were a key characteristic of the period. The mines

were taxed rather than the population. And state-led industrialization was promoted. All contributed

to the downfall of the Zambian economy.

In terms of the politics behind these dysfunctions it is worth noting that a defining characteristic of

the first boom period was the dominance of mining interests, both the mining unions and the mining

MNCs. This was facilitated by the weakness of all other political actors in Zambia during the first

boom, including the local business sector, opposition, and donors.

Taken together, there was therefore a strong coalition during the first boom period that all had

interests in promoting mining interests, despite the government‟s initial preoccupation with

diversification. The government‟s strategy of building a new business community from scratch

therefore proved difficult as they faced this task ―without allies and under attack‖ (Shafer, 1994:

63). Increasingly, the strategy changed to suppression of opposition and local business sector while

relying on support through spending. It should be clear that this political mode of governing was

founded on the large revenues from mining and the nationalization of the mines. It was these

characteristics that created the foundation for the economic problems that unfolded during the first

boom.

Having analyzed the political dynamics during the first boom I now turn to the second boom period.

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4.4. 1991-2010: The privatization and liberalization agenda and its

consequences

―We must ensure that we do not kill the goose that lays the golden egg. There is little

point in taking in a few million dollars in tax [from the mines] if thousands of jobs

are lost as a result‖

- Rupiah Banda, President of Zambia since 2008 (quoted in Reuters, 2009)

As noted previously, the puzzle of the second period is why the state has come to back a situation in

which the state receives a minimal tax-take from the extractive sector and has little political power

over the mines due to privatization. This support is reflected in the opening quote by President

Banda. To shed light on this puzzle I now turn to the analysis of the political dynamic after

privatization and liberalization.

The first part of the analysis will focus on the restructuring of the Zambian economy in the early

1990s and the effects it had on coalitions among the different actors. In the second part, attention is

turned to the puzzle of why the mines were privatized and liberalized. In the last part, the political

dynamics during the current boom will be analyzed.

4.4.1. Part 1: Privatization and liberalization in the early 1990s - The state-donor coalition

‖Our economy is in ruins and even the ruins are in danger‖

- President Frederick Chilupa at the Opening Speech to the National Assembly, 1991

(quoted in Rakner, 2003: 68)

As the quote above reflects, the new Movement for Multiparty Democracy (MMD) government

inherited an economy that was on the brink of implosion. The need for radical restructuring was

evident.

Although the MMD had its origin in the union movement and came to power largely on the back of

this movement, it campaigned on a neo-liberal platform, promising liberalization and privatization

of state-owned industry (Lungu, 2008: 6). While MMD had used its roots in the powerful unions,

the local business community also played a key role in the early years of the MMD movement,

primarily as a source of finance for the MMD (Larmer, 2006b: 296; Rakner, 2003:65). Rakner notes

that the overwhelming electoral victory of MMD is perhaps better ascribed to the public‟s rejection

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of UNIP‟s model of economic management than an accept of the neo-liberal platform (2003: 65).

As such, the coalitions that MMD built its power on consisted of actors with varied interests.

The business sector’s support for MMD‟s ambitious liberalization and privatization plans could

initially be seen as a break from period 1, where the business community was suppressed. The

business community saw the MMD as chance to gain more influence and the MMD at first granted

this. Government officials hosted a number of seminars were the largest business associations

where invited. The business associations also gained a representation on several government boards

and committees (Rakner, 2003: 94). These attempts at representation did not, however, lead to any

meaningful influence (ibid.).

The breaking point in the relationship between the state and business community came shortly after

MMD took power. Partly because of lack of real influence, and partly as the harsh effects of the

rapid liberalization was felt by the business community. In 1993 the two largest non-agricultural

business associations initiated a high-profile public campaign against the government‟s open trade

regime, arguing that the reforms ―kills domestic industries‖ (Abrahamson, 2000: 64; Bräutigam et

al., 2002: 531). The frequent meetings between government and business waned out, and the

government increasingly sought to distance itself from the community (Rakner, 2003: 94). The

positive relationship between state and business turned into a relationship of ―mutual distrust‖

(Bräutigam et al., 2002: 531). The business community was unimportant as a base of political

support and their interests were therefore not prioritized by the government (ibid.: 532).

As a consequence of the break the government had to turn to other parts of society for support. As

the unions were important in their electoral victory it would be natural to assume that they would

base their power on this group.

The unions initially supported the MMD as they had come to realize the need for a radical break

with the economic model of the UNIP era (Rakner, 2003: 82). The support was also politically

motivated as they saw the privatization of state-owned enterprise as a means of breaking up UNIP‟s

old power bases (Fraser & Lungu, 2007: 9). In essence, the MMD government was granted a

“honey-moon” period, in which the unions accepted controversial policies such as the elimination

of all maize subsidies, despite having been opposed to this during the 1980s (Rakner, 2003: 68).

Furthermore, the new President Chilupa was a former leader of ZCTU and had during the campaign

promised miners that their jobs would be safe under a MMD government (Larmer, 2006b: 309).

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With a former union leader as president there was an expectation that the new government would be

more receptive and inclusive towards the unions (ibid.: 308).

It did not take long, however, before the relationship between the government and the

unions soured. This was in part due to the dissatisfaction with the government among the

union leaders, whose members were negatively affected by the economic shock therapy.

But in part it was also an outcome of an active MMD policy that sought to eliminate the

influence of the unions on government. As was also the case with business interests above,

the MMD government increasingly followed a policy of excluding societal groups from the

policy-making process. This strategy was most obvious in relation to the unions (Rakner,

2003: 82). According to industrial relations regulation the government was obliged to call

for quarterly tripartite meeting. By 1994 only four such meetings had been held (Rakner,

2003: 95). As early as 1993, ZCTU leadership denounced the MMD government (Rakner,

2003: 95).

Whereas local business interests were excluded in both period 1 and 2, the state‟s

relationship with the unions presents a clear break with the past. In period 1 the unions had

a strong hold on government. In contrast, period 2 saw a clear break between government

and the unions. How could the government afford to turn away from the unions when they

had been such an important actor in period 1?

One explanation was the neo-liberal economic reforms themselves. The reforms decimated

union membership as the open trade regime and public cuts meant that between 30,000-

50,000 jobs were lost in the period of 1992-1996 (Rakner, 2003: 96). All through the 1990s

the unions lost much of their financial and membership base (Larmer, 2006b: 311). The

government sought to exploit this weakness and severed themselves from the historically

strong unions.

The combination of a strong government mandate for change, and the weakened union and

business sector meant that the state in the 1990s opted for an extremely centralized

coalition in governing the country. The economic reforms did not provide any winners and

as a result, “no sector emerged that could be characterised as a new constituency in favour

of the economic reform policies― (Rakner, 2003: 17).

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However, as we would expect from the theoretical section, no government can govern

without a coalition that is willing to support it in its quest to carry out changes. The MMD

built such a coalition by insulating the bureaucracy from the reform process, and by

entering into a close coalition with the donor community, as shown below.

While the government used the economic reform momentum to challenge the power of the

previously strong unions, the case was different in relations to the strong but inefficient

bureaucracy inherited from the UNIP era. The donor community did try to push through

reform of the bureaucracy and the government did include promises of modernizing and

downsizing of the bureaucracy, but little was done in this regard. The government adopted

a World Bank program intended to downsize and streamline the bureaucracy, which

included a goal of laying-off 25 percent of public employees within 3 years (Rakner, 2003:

71). Instead the civil service grew by 19 percent between 1989 and 1994 (ibid.). The

government had made plenty of foes with the economic reforms and was clearly not ready

to alienate public employees and therefore decided against reforming the bureaucracy

which meant that inefficiencies continued.

The donor community had the advantage that unlike the unions and business sector they

could provide the one thing that government was most in need of, namely hard cash.

According to the resource curse literature, governments in resource rich countries will look

to the extractive sector to secure funds. But the copper sector was in a dismal state in the

1990s. Wages for the mining workers were being funded by government loans, while the

mines were making a loss of approximately USD 1 million per day (Lungu, 2008: 8). The

mining sector had lost its function as a cash cow and had instead become a burden on the

state coffers. Therefore, the overriding objective of the government was to secure funds in

order to stay in power. Of all actors involved in Zambian politics only the donor

community could provide this. Hence, a coalition was formed with donors. This explains to

a large degree the fact that the economic reforms carried out in the 1990s essentially were

the same that the IMF had pressed for during the 1980s. As has been pointed out, it was a

policy-making process of ―aid for reform‖ (Rakner, 2003: 134). The donor-state coalition

meant that popular objections to reforms were put aside:

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―…the MMD was forced to choose between maintaining its popular support base

and meeting donor conditions. It has consistently chosen the donors‖ (Larmer &

Fraser, 2007: 616)

This created a situation of so-called ―disciplined democracy‖, whereby economic

decisions were external to the political system (Abrahamson, 2000). The consequence was

that the chances of a domestically based coalition were lost.

The donors anticipated that economic liberalization would be followed by political

liberalization (Abrahamson, 2000: 63-64). However, the narrow coalition necessary to

continue the unpopular economic shock therapy meant that the MMD government could

not garner much popular support. In essence, the reforms produced few winners but many

losers. As the 1996 elections approached the MMD government increasingly sought to

suppress political opposition due to fears of losing power. The election was marred by

severe irregularities and the opposition decided to boycott the elections. As a result, the

MMD secured 73 percent of the votes in a sham of an election (Rakner, 2003: 108-111).

4.4.2. Part 2: Privatization and liberalization of the mines: Donor dominance

While the state-donor coalition was relatively stable during the 1990s, the coalition came

to a deadlock on the question of privatization and liberalization of the mines. In 1992 the

idea of privatizing the mining sector was floated by a minister in the MMD government. A

public outcry followed immediately, not least from the unions (Rakner, 2003: 95). Since

then, the issue of privatization of the mines was not pursued by the government.

The donors, however, insisted on the need to privatize the mines and when the issue of debt relief

came on the agenda in 1996 they were quick to link the two together through conditionality (Lungu,

2008: 6). The crushing debt was perhaps the most important constraint on the Zambian economy.

Faced with the hard choice of going against the wish of powerful domestic actors in Zambia, and

the wish of the donors, the MMD government once again chose to please the donors (ibid.: 7).

Throughout the period of 1997-2000 the mines were divided and sold to foreign investors.

This furthered the break with the unions. Thus, as the mines were privatized the welfare function of

the mines created in the UNIP years seized to exists, creating widespread dissatisfaction (Fraser &

Lungu, 2007).

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The forced privatization and liberalization of the mines showed the increasingly skewed

relationship between the government and the donors, which explains the puzzle of why privatization

was pursued at all. While the two had found common ground on a platform of reforming the

economy along neo-liberal lines in the early 1990s, the inclusion of the mines in this reform agenda

broke the common ground between the two. This did not create a break between the government

and the donors. However, it did create a precarious political situation when the boom in copper

prices hit Zambia, the focus of the next sections.

4.4.3. Part 3: The boom of the 2000s: Understanding the unsustainable development model

The forced privatization process of the late 1990s put the government in an unfavorable negotiation

position. Copper prices were historically low, support for the government was at a low-point, and

the pressure from the donor community meant that the government was in a hurry to sell.

Consequently, the so-called Development Agreements (DAs) outlining the conditions of investment

were extremely favorable to the mines (Ratty, 2008 : 18).

The DAs liberalized the regulation of the mines, removing the social functions of the mines, as well

as lowering environmental standards, and, as has already been described, the tax burden was

minimized (Lungu & Fraser, 2007). For the donors, the need to privatize and liberalize the mines

was not only necessary in terms of economic efficiency, it was also necessary in order to

demonstrate Zambia‟s new development model. As one World Bank report on Zambia stated, the

privatization and liberalization was necessary “for providing a clear signal to investors of the

Government of Zambia‘s commitment to private enterprise‖ (quoted in Ratty, 2008: 15).

The government on the other hand seemed mostly concerned with reviving the mining sector in

order to secure jobs to the miners in order to avoid political discontent from this once powerful

group. Securing taxation from a sector that was seen to be in a free-fall was not pursued.

Investments in the sector did not materialize until after 2003 when the price of copper started

soaring, suggesting that the DAs had little effect on the investment decision compared to the price

of copper (SARW, 2009: 23; Fraser & Lungu, 2007: 20). However, from 2003 and onwards

investment soared and can be accredited with saving the mining industry in Zambia.

While the mining sector was saved and resumed its former position as the most profitable and

productive sector in the country, the boom left the state with little additional tax revenue. Table 4.5.

shows the government‟s sources of income during the height of the boom.

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Table 4.5.: Taxes, grants and budget balance 2006-2007, all numbers in percent of GDP

2006 2007

Mining

taxes 0,6 1,4

Other taxes 16,1 17,9

Income taxes 7,5 8,4

Value-added tax 4,6 4,9

Excise taxes 2,1 2,6

Customs duties 1,9 2

Nontax 0,8 0,7

Grants 26 4,6

Project and budget

support 4,6 4,6

Debt reduction 21,4 0

Overall balance of budget

Including grants 18,6 -0,2

Excluding grants -7,4 -4,8

Source: IMF, 2009: 17

What is perhaps most interesting from figure 4.5. is the relative size of donor grants compared to

mining taxes. In 2006 where debt relief was granted, donor funding was more than 43 times larger

than mining revenue. This shows how high the stakes were for the state in giving in to the demands

of the donors in relation to debt relief. In 2007, after debt relief was delivered and thus a year when

donor funding resumed its regular level, funding from donors was still more than 3 times the size of

revenue from mining. At the same time it is clear from figure 4.5. that the government‟s budget

only barely balanced due to donor funding. Without these funds, there would have been a budget

deficit of 4.8 percent of GDP in 2007, at the height of the mining boom.

The coalition between the government and the donors makes sense judged by these numbers.

Whereas the traditional resource curse theory sees the mining sector in a boom period as a cash cow

providing seemingly unlimited revenue for the government, the situation in Zambia points to a

completely different picture. The state could secure much more funding by staying on good terms

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with the donor community, and so they did, despite having to take politically controversial

decisions. Rent-seeking behavior from the government had changed from targeting the mining

sector to targeting the donors. Arguably, this change in focus can go a long way to explain the

improvement in macroeconomic performance in the boom of the 2000s, documented earlier10

.

However, the dynamics of the boom spelled political trouble for the government and its reliance on

donor interests. As prices soared domestic discussion on whether the country was getting a fair

share from the copper exports surfaced. In the midst of this discussion the DAs were leaked to the

public and the details of the investor-friendly agreements were available for all to see. Combined

with several high-profiled stories in the press of dismal safety standards and poor working

conditions for workers at the new mines a public outrage followed (Fraser & Lungu, 2007: 627).

The opposition parties, especially the Patriotic Front (PF) quickly sought to capitalize on this

outrage. In both the elections of 2006 and 2008 they promised to increase taxes on the mines and

punish investors who did not follow domestic regulation on working conditions (Lungu, 2008;

Ratty, 2008). The following excerpt from the PF‟s manifesto from the 2006 election campaign

demonstrates the pro-urban and pro-mining union stance taken by the party:

―The main beneficiaries of the MMD regime, apart from relatives and friends, are

mostly foreigners. . . . [The MMD‘s] leaders seem to have no conscience, because

they have not been moved by the plight and suffering of the Zambian workers, who

have been reduced to daily casual employees in their own land, while foreign firms

and consultants feast on their sweat and diminishing natural resources‖ (quoted in

Fraser & Lungu, 2007: 626)

On this platform The PF improved their election result between 2006 and 2008 with 9 percentage

points of the votes, while MMD lost 3 percentage points, with only 2 percentage points separating

the two parties in 2008 (Electoral Commission of Zambia, 2009). The electoral landslide was

primarily made possible through the PF‟s strong stand on the Copperbelt, where they secured 65%

of the votes in 2008 (ibid.). The opposition had clearly found a powerful message in attacking the

government‟s stand towards foreign investors.

10

This has to do with the fact that most bilateral and multilateral aid is only disbursed on the condition that the country

adheres to the structural benchmarks set forth by the IMF. These benchmarks are overwhelmingly focused on core

macroeconomic indicators (see IMF, 2010: 33-35 for an overview of the benchmarks).

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The message was most popular among people living in urban areas, and as the election result from

the Copperbelt indicates, especially in mining communities. The unions saw in the PF a new

possibility for political inclusion after almost two decades of MMD suppression (Ratty, 2008: 1-2).

The unprecedented level of organised political opposition to the MMD did not, however, only come

from the political parties and unions. Unlike in period one where most of the civil society had been

supressed by the one-party state, period two had seen an opening up of the space for civil society to

organise more or less freely, often encouraged and funded by donor support. Civil society

organizations were openly against the neo-liberal economic reforms of the MMD government and

the need to tax the mines became a key issue for them11

(Fraser & Lungu, 2007: 617).

A testament to the unfairness of the DA‟s was the donors‟ change of stance during the boom. While

the World Bank and IMF had pressed through the privatization and liberalization they too began to

argue that the DA‟s were too favorable to the investors (Lungu, 2008: 9).

With civil society, the opposition, the unions and even donors arguing for a change in the tax

regime surrounding the mines it would seem that a new political course was a possibility in Zambia.

With this also came the possibility for government to forge a new coalition, one that would bring

more revenue to the Zambian state from mining and thereby break the flawed development model

put in place in the 1990s.

Initially this is exactly what the MMD government attempted. In 2008 the Mwanawasa MMD

government decided to annul the DA‟s and introduced the new tax regime. This was done with

―with massive support from the non-governmental organisations and civil society in general‖ and

was seen as an attempt to “counter opposition party claims that it had sold Zambia‘s sovereignty‖

(Lungu, 2008: 9-10).

This was a bold move and brought the government in direct confrontation with the mining MNCs.

However, as the financial crisis hit Zambia in 2008 the changes were watered down after immense

pressure from the MNCs that threatened to pull out their investments. Furthermore, the mines

threatened legal action as they argued that the government did not have the authority to break the

DA‟s and consequently they did not pay the new taxes while they were in place (Lungu, 2008: 12).

11

Arguably, one could credit the civil society organizations with bringing the issue at the top of the political agenda. It

was two reports from civil society organizations that initiated much of the debate on mining taxation in Zambia (the

reports being Fraser & Lungu, 2007 and SARW, 2009).

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The fact that the mines were granted concessions despite the immense pressure on the MMD

government for higher taxes shows the degree of power that the mines have over the government. It

would thus seem that the mining MNCs and the government have become close allies, where both

stand to benefit from cooperation. The benefits to the mines are quite obvious in terms of less

regulation and hence higher profits. What are not as obvious are the benefits that the government

gets form this arrangement. From the viewpoint of the resource curse theory it does not make sense

why the government actively chose to forego additional revenue they could have used to buy

support and at the same time please domestic constituencies. However, given the political realities

in Zambia after privatization and liberalization I will argue that there are at least two good

explanations.

Firstly, although there is widespread agreement and support for putting in place higher taxes on the

mines, the politics of doing so is not the clear-cut win-win situation for the government that it first

appears. With the voters on the Copperbelt being the key to winning the next election, any political

party wishing to win the presidency will have to stay on good terms with this electoral group. As

the unions are the most powerful political force in this province, their support is crucial. And while

it is true that the unions have supported the drive to tax the mines more (Southern Times, 2010),

they also have an interest in keeping as many jobs in the sector as possible, which liberal regulation

might ensure. Most importantly perhaps, the unions have also insisted that if any investor pulls out

of the country, the state should re-nationalize the abandoned mine to avoid job losses. This situation

became relevant during the financial crisis in 2008. During the crisis the Luanshya Copper Mines

closed down operations, citing the low copper prices as the cause. MUZ quickly called for a

nationalization of the mine and initially the MMD government promised to intervene. However, the

President soon backtracked to the fury of the MUZ (Zambian Chronicle, 2009). As Zambia‟s budget

is only barely balancing even in these economic boom years, and public borrowing is limited to

0.6% of GDP as part of the IMF conditionality (Weeks, 2008: 9) it would be a disaster for the

government to have to give into calls for re-nationalizing failed mines. As such, one could speculate

that it was in fact the pressure of the mining constituency coupled with the need to stay on good

terms with the IMF that created the political need to water down the new tax system.

Support for this explanation can also be found in the PF‟s position on taxing the mines. As already

described, the PF based much of its popularity on promising to tax the mines more. However, in

2008 during the financial crisis they changed their position overnight, arguing that jobs needed to be

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protected even if this meant that the new proposed increases in taxes had to be abandoned (Lungu,

2008: 13). As both the PF and MMD are pandering to the Copperbelt electoral groups they seem to

have come to the same conclusion: Securing jobs is more important than securing more revenue for

the state. Note that the mining sector as a whole was not threatened by the crisis in 2008 and the fall

in copper prices, as it was only a few marginal mines that were in danger of closing, but even the

prospect of a few thousand jobs being lost was apparently enough to change the minds of both the

MMD and PF.

A second explanation is at one and the same time highly likely but also somewhat speculative - it is

the issue of corrupt ties between the state and the foreign investors. It is speculative since very little

hard evidence exists of such corruption. However, as I will argue, it is highly likely that it is a factor

in Zambian politics.

This is the case since corruption is endemic in the country12

. A study on constraints facing business

in Zambia sheds some light on this otherwise murky issue. The study asked business representatives

in Zambia to rank constraints facing them. Among foreign investors 51 percent ranked corruption as

a major constraint. The respondents estimated that a typical firm on average spends 1.7 percent of

their total revenues on bribes (World Bank, 2004: vi). Seeing that the mining sector is the largest

business sector in the country with the highest earnings, and at the same time is the most favored by

government in terms of regulation it would seem unlikely that they are not part of this wider picture

of corporate corruption. Assuming the mining sector pays 1.7 percent of its earnings in corruption

this would amount to no less than 47.3 million USD in bribes per year during the boom13

. No doubt

this is a speculative estimate but it none the less shows the potential for large scale corruption in the

sector14

.

In Zambia the issue of funding for election campaigns is particularly touchy. With little revenue

accruing to the party from building a popular base among the wide population who live in dire

poverty, the parties are keen to attract funds from the business sector. This was highlighted by

President Banda in a recent speech at a MMD fundraiser:

12

Transparency Internationals Corruption Perception Index ranks Zambia as number 101 out of 178 countries in terms

of corruption in 2010 (Transparency International, 2010).

13 This is estimated as 1.7 percent of the $2.7 billion earnings in the mining sector in 2008 (World Bank 2010b).

14 Furthermore, the extractive MNC‟s and the extractive sector in general are renowned for its corruption (see Shaxson,

2007 for a description of some of the most high profile corruption scandals concerning the oil industry in Africa).

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―Don‘t underestimate our opponents, don‘t think you are the only ones with

resources because you don‘t know where the opposition get their resources from. We

have to work hard at being in good terms with the business community. Listen to

them, understand their problems and do something about it.‖ (Lusaka Times, 2010)

As the economic shock therapy has meant that the MMD are no longer on a good standing with

most of the local business community, it would seem plausible to suggest that the President is

referring to foreign investors, not least in the mining industry. Of course such a relationship does

not need to be corrupt as corporate party financing is a reality in most democracies. However, the

line between due and undue influence is thin and judging by the large influence of the mining sector

on government policy, it would seem relevant to describe the situation as outright state-capture by

the mines.

State-capture describes the situation in which big corporations use their large influence on weak

governments to influence the regulatory environment (Kaufmann & Hellman, 2001). There is no

doubt that the mining MNCs had a large degree of influence on the content of the DA‟s, thereby

more or less writing their own regulation. As well, the government turnaround on taxes in 2008 also

points to a large degree of influence from the mining sector on government policy. The fact that the

government refuses to tax the mines more, despite the backing of the corporate friendly World Bank

and IMF arguably shows the large influence of the mines on the government.

The way the DA‟s were negotiated no doubt was conducive for building the close ties between the

government and the mining MNCs. The negotiations took place between the executive and the

mining MNC‟s without any involvement of Parliament and with no disclosure of the contracts that

resulted. As the Permanent Secretary of the Ministry of Mines has later revealed, the regulation

surrounding the mines were a result of the wishes of the new investors, not the government (Lungu

& Fraser, 2007: 11).

4.5. Summing up: Booms then and now – ownership and regulation as the

missing piece

From the above it should be clear that the change in ownership and regulation of the copper sector

in Zambia has had large effects.

Firstly, it was shown in the economic analysis that the macroeconomic management of the second

boom has been vastly superior to that of the first boom period. The change in unearned income,

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brought about by the privatization and liberalization of the copper sector was highlighted as the

defining factor in explaining this.

Secondly, the political analysis showed how the privatization and liberalization of the Zambian

economy, including the mining sector, altered the behavior of the government between boom period

1 and 2. In the first period the fit between the resource curse theory‟s three explanations and the

situation in Zambia was near perfect. The boom led the UNIP government to rely on neo-

patrimonial redistributive policies, and rent-seeking became widespread, with especially the urban

areas and the powerful unions benefitting. Furthermore, economic diversification was lost in the

government‟s attempt to steer the economy through a bloated and unprofessional bureaucracy. The

weakness of the domestic business community contributed to this strategy. As such, the governing

coalition had no interest in promoting long-term development for the reasons specified by the

resource curse literature.

In the second period, the government came under strong external pressure from donors to privatize

and liberalize the economy. The donors overtook the role of funding the government from the

mines, but in return increasingly dominated and dictated economic policy, bringing about the

improvement in macroeconomic management seen in period 2. The donor-government coalition,

coupled with the effects of neo-liberal shock therapy meant that neither the previously strong

unions, nor the domestic business community became strong actors in the second period. Hence,

much of the patronage system minded at urban groups was dismantled while the politically sensitive

subject of reforming the bureaucracy was not pursued as it was deemed too costly politically.

Two explanations were presented for the continuation of the liberal tax regime despite strong

pressure to alter this. Firstly, electoral pressures from the Copperbelt combined with the IMFs

structural conditions proved one explanation. Secondly, it was argued that the state has become

captured by the interests of the mining MNCs through the highly secretive privatization process.

The result was a new unsustainable development model in which Zambia is being drained of its

sub-soil wealth and little is done in order to diversify the economy away from copper. As in period

1, there are no strong interests in the governing coalition pressing for diversification.

Table 4.6. provides a simplified overview of the difference between period 1 and 2.

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Table 4.6.: Differences between period 1 and 2

Boom period 1 Boom period 2

Ownership and regulation of

the mines

National / non-liberal Private / liberal

Macroeconomic management Disastrous Exemplary

Long-term development

prospects of the coalition

Weak. Economic policy hurtful

for local business.

Mismanagement of revenue

from the copper sector. No

constituency pressing for

diversification.

Weak. Wealth being drawn out

of Zambia with little or no

compensation. No constituency

pressing for diversification.

Coalition Government and urban/union

interests.

Government, donors and

mining MNC‟s.

It would seem that the explanations presented in the contemporary resource curse literature fare

much worse in explaining the dynamic during the second boom. Neo-patrimonial politics and rent-

seeking are still features of Zambian society, but not to the extent seen during the first boom period.

Equally, state-led industrialization has not been pursued. Lastly, the level of personal taxation has

increased during the boom. Consequently, the negative effects predicted by these three

explanations, namely a deterioration of macroeconomic indicators, could not be given support in the

second period. That the three explanations presented by the resource curse are not relevant in

Zambia in period 2 should not come as a surprise as they are all founded on the assumption that the

state receives massive unearned income during a boom, and has autonomy over domestic policy.

Both of these assumptions have been shown to be wrong in the context of present-day Zambia after

privatization and liberalization.

4.6. Controlling for third variables: The effects of institutions

In the methodological section of this thesis it was highlighted that the comparison of the two boom

periods in Zambia is complicated by the fact that there have been major institutional changes

between the periods. Zambia has improved its score on all but one of the six Worldwide

Governance Indicators produced by the World Bank in the period of 1996 to 2008 (World Bank,

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2010c). Freedom House has also improved the country‟s score on both political and civil rights over

the period of 2002 to 2009 where data is available (Freedom House, 2010).

This raises the question whether the different behavior in the two booms can be explained with

reference to these improvements. This is a highly relevant question as the resource curse literature

has increasingly used institutional quality as the explanation of whether or not the curse emerges. If

this is the case for Zambia then the focus on the strength of political actors and their coalitions and

on the relationship with privatization and liberalization might be flawed. However, as I will attempt

to show bellow, it is dubious that improvements in democracy and institutional quality have been a

factor in changing behavior between period 1 and 2.

First of all, as already pointed out in the theoretical section, weakly consolidated democracies with

few checks and balances should be more likely to experience the resource curse than their

authoritarian counterparts (Collier, 2007: 37). Zambia is definitely a weakly consolidated

democracy, with the election in 2006 being the first relatively free and fair, and the MMD having

been in power since 1991. Furthermore, few checks and balances exist on the executive. Therefore,

if anything, the introduction of democracy should have increased the probability of the curse

surfacing in second boom period. If there is a bias, then, it works against the findings in this thesis.

However, it was noted that the electoral pressure from the Copperbelt might be one explanation of

why the current unsustainable model is kept in place. Does this not mean that democracy has altered

the political dynamics? Not necessarily as it must be remembered that the UNIP government also

was preoccupied with maintaining a good relationship with this part of the country under one-party

rule.

The case for improvements in institutional quality being the determinant of changed behavior is also

weak. While it is true that institutional quality has improved, it is still very low. And as specified in

the theoretical section, existing studies tend to find that the institutional quality has to be at the level

of the OECD countries in order to reverse the curse. To argue this is the case for Zambia seems

unwarranted. The fallacy of the argument can be made clearer when Zambia is compared to other

countries15

. In terms of “government effectiveness” Zambia scores the same as Madagascar, known

for its recent coup. On “regulatory quality” Zambia is equal to Niger, another country renowned for

15

The following comparisons are made by using World Bank‟s Worldwide Governance Indicator scores for 2009

(World Bank, 2010c).

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its lack of development and political conflicts, including a coup in 2010 as well as famine. On “rule

of law” Zambia scores slightly less than Gabon, a country used as one of the prime examples of

how a country‟s political system can be ruined by natural resources (Shaxson, 2007: 63-82). In

terms of “control of corruption” Zambia‟s score is almost the same as that of Liberia, a country only

just emerging from a complete breakdown of the state after a long civil war. Although it is true that

Zambia performs better than some of its resource-rich counterparts in Africa, such as Angola and

Nigeria, it is clear that Zambia is by no means exceptional in sub-Saharan Africa in terms of

institutional quality.

Furthermore, and perhaps more important, the argument for institutional quality as the defining

variable in resource-rich countries rely on the assumption of unearned income as the main problem.

As has been argued at length this is, however, not the most pressing issue in Zambia.

Lastly, many of the writers on the resource curse highlight the importance of good institutions as a

means to create more accountability and transparency. These two issues are part of the standard

good governance recommendations for overcoming the curse. While the Zambian political system

has developed institutions that are perhaps in theory more open than under one-party rule this does

not mean that accountability and transparency have actually been improved. In fact, what stands out

from the analysis of period 2 is the deterioration of both the government‟s accountability towards

the domestic population and transparency in the extractive sector. As was shown, the government

has throughout the current boom period relied on the support from donors and the mining MNC‟s,

at the expense of domestic constituencies. Accountability in a situation where government is not

relying on domestic groups for support and is not in control of the policies it pursues is not the basis

for meaningful accountability. Equally, the privatization and liberalization process of the mines was

characterized by an extreme lack of transparency, with the DA‟s being negotiated secretly and kept

from the public for years until they were leaked. To argue that the improvements in institutional

quality have improved either accountability or transparency would therefore seem dubious.

Taken together, it seems that improvements in institutional quality and democracy cannot on their

own explain the different behavior observed in period 1 and 2. In contrast, I hope the analysis has

shown that the links between privatization and liberalization and the change in the political

dynamics in Zambia are more readily observable and plausible in explaining the differences

between period 1 and 2.

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5. DISCUSSION: THE RESOURCE CURSE, OWNERSHIP,

REGULATION AND POLITICS

Having analyzed the effects that privatization and liberalization had on the occurrence and

political dynamic in the Zambian case I will now turn to the task of discussing the

implications of the analysis. In accordance with the hypothesis generating single case study

methodology approach used in the analysis, inference to the theory of the resource curse is

the prime purpose of this thesis. Therefore, the first part of the discussion seeks to develop

some hypotheses from the Zambian case study that infers to the theory of the resource

curse.

In the second part of the discussion I will discuss whether the results from the Zambian

case can be inferred to other resource-rich developing countries. This issue is more

difficult to explore since the study is constrained by the single-case study approach in

terms of generalization to other countries, and as such this part of the discussion should be

viewed as more tentative. However, the question is highly relevant as the results from the

analysis could have much wider implications, also in terms of policy prescriptions, if it can

be showed that Zambia is not unique in its experience during the second boom. Therefore

the issue of generalizing to other countries will be given attention.

5.1. Inferring to the resource curse theory

In what follows, I will argue that three new hypotheses can be developed from the

Zambian case study. These hypotheses infer to the theory of the resource curse and as such

attempt to provide us with a better understanding of the theoretical underpinnings of the

resource curse.

5.1.1. Hypothesis 1: Unearned income is an independent and dependent variable

The analysis of Zambia showed that privatization and liberalization have the potential to radically

change the amount of unearned income accruing to the state. As was discussed in the theoretical

section, the resource curse theory sees the amount of unearned income as the crucial independent

variable that sets in motion the dysfunctional effects associated with the resource curse. This

understanding of the resource curse was verified in the analysis of Zambia, where the sharp

reduction in unearned income accruing to the state proved vital in alleviating the negative effects

described in the curse literature.

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On the one hand then, the analysis has found strong empirical support for the contemporary

explanation of the resource curse, which highlights that it is not the amount of natural resource

abundance or export dependence that creates the negative effects described by the resource curse,

but rather the amount of unearned income that accrues to the state. As such, unearned income is

rightly seen as the independent variable in the more contemporary literature. This in itself is an

important finding as it contributes to the ongoing debate on how to best measure the curse, shortly

described in the theoretical section. Furthermore, the analysis of Zambia showed that using resource

abundance or dependence can be a weak, and even misleading, proxy for unearned income as rents

in the sector have never been higher than during the last couple of years, while unearned income has

never been lower. As a database is missing on the amount of unearned income it also suggests that

the preoccupation by much of the contemporary resource curse writing with statistical methods is

problematic.

While support has on the one hand been found for the contemporary writing on the resource curse

in terms of specifying unearned income as the central independent variable, on the other hand the

study also found serious problems with only viewing this variable as independent. Thus, the

analysis pointed out that large amounts of unearned income cannot be assumed to be the effects of

high rents in the extractive sector, as the contemporary writing tends to do (Jones, 2008: 21).

This finding questions whether the key characteristic of resource-dependent states is always a

seemingly endless stream of unearned income during a boom. State expansion, fostered by neo-

patrimonial redistributions, rent-seeking and state-led industrializations cannot be expected in the

wake of a boom in states such as Zambia. This finding should have strong validity as it was shown

that Zambia had reacted in this fashion during the first boom, proving that these mechanisms could

take place in Zambia. As privatization and liberalization had been implemented, behavior was

altered. Other changes over time, such as institutional improvements or the introduction of

democracy could not be validated as sufficient explanations of this change.

The explanation for the disconnection between rents and unearned income was found to be

regulation and the ownership form. Therefore, a hypothesis of this thesis is that unearned income is

itself a dependent variable, shaped by regulation and ownership. Drawing on figure 2.1 from the

theoretical section we might therefore change the causal understanding of the resource curse to

include an interaction effect from regulation and ownership. This is shown in figure 5.1.

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Figure 5.1.: The causal effects of regulation and ownership on the resource curse

It is the hypothesis that the interaction effect of regulation and ownership structures work in the

following way: Ownership of the extractive sector can be seen as a continuum from total state

control with managerial control, to total private ownership with full managerial control. As

ownership forms move from national to private ownership on this continuum, the weaker is the

positive relationship between rents and unearned income. Similarly, as regulation becomes more

liberal, the relationship between rents and unearned income becomes weaker. Regulation and

ownership are treated as one variable as they turned out to be highly correlated in the analysis of

Zambia. Whether this holds true for all cases where privatization has been carried out will have to

be the subject of further research however.

Let me elaborate a bit on the above hypotheses. It might be accepted that unearned income

decreases as regulation becomes more liberal, as the tax code is perhaps the most central part of

regulation in the extractive industry. However, it might be less clear why privatization also has the

effect of decreasing the amount of unearned income. However, this follows from the second

hypothesis explored in the next section, namely that the strength of political actors engaged in

resource-rich societies is crucial in shaping the political dynamics and developmental outcomes in

resource-rich societies. As was clear from the analysis of Zambia, privatization creates private

actors with strong vested interests in keeping regulation liberal, which has the effect of increasing

the likelihood of a weaker link between rents and unearned income than assumed in much of the

literature.

5.1.2. Hypothesis 2: Institutions are shaped by politics

The simplified models of the resource curse theory tend to pay very little attention to politics in the

sense used in this thesis, that is, as a struggle among different actors over the distribution of scarce

Natural

resources Rents Unearned

income

Political

dysfunctions

Economic

dysfunctions

Institutions Regulation

and

ownership

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resources. Too often the state is seen as the only relevant actor, with the population at large being

seen as potential ―rent-seekers‖. This situation is taken as a constant in resource-rich societies.

Institutions are then assumed to alter the behavior of the actors, determining if rent-seeking

behavior is profitable to engage in.

This analysis has proved this simple understanding of politics in resource-rich developing countries

potentially misguided. The political dynamic in both periods was complex and shaped to a large

degree by the strength of non-state actors. In addition, institutional improvements in the good

governance sense did not explain the alteration of behavior between the two periods. Instead, the

regulatory environment and ownership, two institutional factors ignored by the vast majority of the

resource curse theory, proved to be the most important factors in bringing about a change in

behavior. Changes in behavior were brought about by changes in the power of the different actors,

which brought about changes in the institutional frames of the economy, including ownership and

regulation. Both privatization and liberalization became a reality only as the power structure

between the unions and the donors tipped in the advance of the donors.

As such, the case study showed that institutions can to a large degree be shaped by politics, instead

of institutions shaping politics.

Figure 5.2.: The relationship between politics and institutions

- The resource curse theory

- The Zambian case study

This has large implications for the advice given to many resource-rich developing countries which

tends to be that they should improve their institutional quality. Institutional changes are not likely to

occur unless a coalition of political actors can be built for such changes. Thus, behind any

institutional changes lies a political settlement among the political actors. Not surprisingly then,

institutions are better viewed as the mobilization of bias towards specific groups rather than

technocratic solutions to political problems, such as the good governance approach tends to view

Institutions Politics

Politics Institutions

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institutions (Leftwich, 2000: 107). A key point of the analysis is that privatization and liberalization

strengthens the private extractive companies at the expense of the unions.

However, it should be equally clear that institutions can also shape politics, so it is not a question of

one or the other causal mechanisms. Rather, the point is that politics and institutions are shaped in a

complex interaction between each other, which is a break from the existing understanding which

tends to favor institutions over politics as an explanatory factor in resource-rich countries.

5.1.3. Hypothesis 3: The political actors involved in resource-rich developing countries

matter

According to the resource curse literature, developing countries rich in natural resources are

characterized by two actors, the state and society, who for reasons specified in the theoretical

section, are assumed to share an interest in redistributive policies and state-led industrialization.

From this starting point the change in ownership and regulatory environment surrounding the

copper sector in the Zambian case at first seems a puzzle. Why would the MMD government go out

of their way to ensure that the mining companies pay as little tax as possible if both the state and

society have an interest in redistributive policies, including state-led industrialization?

The analysis showed that this puzzle can only be accounted for by the different constellation of

political actors in the two periods. Whereas the unions and mine-workers were dominant in the first

period, the donors and mining MNCs were so in the second period, creating the potential for

change. Liberalization and privatization of the wider economy weakened the unions and domestic

business community, whereas the strength of the donors weakened the state which made

privatization of the mines a possibility. Privatization of the mines created a new strong political

actor in the mining MNCs, who entered into a coalition with the state through state-capture. The

political dynamic during the current boom was altered significantly as a result. Perhaps this is the

most important finding of the study, as this focus on the importance of political actors in shaping

the political process in resource-rich countries is lacking in much of the resource curse writing. This

is especially true as the analysis showed that there are many more actors involved in the political

process than just the state and societal groups.

Instead, the analysis showed the importance of external actors, such as the donors and mining

MNCs, as drivers of change in Zambia during the second boom. So far, very little attention has been

paid to the role of external actors in curse literature:

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―[the resource curse thesis] fails to give due account to external factors and, instead,

treats countries as ‗lithe leviathans‘… with complete autonomy and foresight over

domestic politics.‖ (Jones, 2008: 22)

Perhaps this omission is an outcome of the resource curse‟s analytical fixation on the boom period

during the 1960s and 1970s, in which external actors played a smaller role than today, as was also

the case in Zambia.

However, the Zambian case showed the external actors gained immense importance in shaping

politics in the 1990s and 2000s. Thus, the donors and the government entered into a strong coalition

in favor of neo-liberal reform of the economy. This produced the possibility for the government to

sever the ties to the traditionally strong unions. As the effects of the reforms were felt in society,

this tendency was enhanced as the economic shock therapy decimated the unions and the local

private sector. In addition, aid took the former importance of the mines in funding the government.

Should any doubt remain on the enormous influence that donors had over the government in the

1990s one only needs to look to the decision of privatizing the mines, which the government tried to

prevent but nonetheless became reality after donor-pressure. The privatization itself created a new

coalition between the MNCs and the government. The consequence was liberal regulation,

including a minimal tax-take from the mining sector. It should be clear from the analysis that the

unsustainable model of development in place in Zambia today is the direct outcome of these

political dynamics, and are kept in place by the strength of the actors involved in modern-day

politics in Zambia.

Therefore, the simple rent-seeking model of dysfunctional dynamics being promoted by the ties

between the government and the rent-seeking population is not sufficient in understanding Zambian

politics today. The donor-driven process of privatization and liberalization and the subsequent state-

capture by the MNCs has rendered this model obsolete. Instead, Zambian politics has to a large

degree been externally driven since the 1990s.

Furthermore, the analysis also pointed to domestic non-state actors that the resource curse has so far

dealt inadequately with. The mining unions are one example. The Zambian case showed the

immense importance of this group, especially in the first period. However, as with the external

actors, the role of unions has not received the amount of attention in the curse literature that they

seem to deserve. Equally, the role of NGOs during the second boom proved critical. The NGOs

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were crucial in setting the political agenda of reforming the tax code for the mines. With the help of

the opposition they almost succeeded in this endeavor. The increasing importance of NGOs in poor

resource-rich countries has also been noted by others (Bebbington et al., 2008: 902-903), but has

hardly been covered by the mainstream curse literature.

Of course, this is not to say that the actors that were important in Zambia will be important in all

resource-rich developing countries. Instead, the point is that the strength of actors that are not given

attention in the mainstream resource curse literature has the potential to alter the occurrence and

dynamic of the curse. The point is thus that we cannot assume which actors are of importance in

advance, but rather we need to subject this to empirical testing when dealing with resource-rich

countries.

Therefore, it would seem that the resource curse theory could gain from paying more attention to

politics and the actors involved in this.

5.2. Inferring to other countries

Having analyzed and discussed the implications of the Zambian case for the resource curse theory

let me now turn to the more challenging task of discussing the implications for other developing

countries. I will focus mostly on sub-Saharan Africa and Latin America as these are the regions in

which most of the resource-rich underdeveloped countries are situated (Mayer & Fajarnes, 2005).

Latin America has long been home to many to many of the traditional resource-rich developing

countries (Auty, 1993). Sub-Saharan Africa is on the other hand relatively resource-poor. However,

it has been pointed out that new reserves are likely to be found in this region16

. Perhaps most

importantly, the rising demand of Asian economies such as China and India is pressing African

countries towards more reliance on natural resources (Mayer & Fajarnes, 2005: 24).The question

then is whether the neo-liberal extraction model of Zambia is relevant for these countries.

5.2.1. The relevance of the neo-liberal extraction model of Zambia

The task at hand is to demonstrate that Zambia is not an outlier in terms of its management of

natural resources but can be said to be relevant for other resource-rich underdeveloped countries.

16

For example, while the African region is only home to 5 percent of proven global oil reserves it is at the same time

responsible for 20 percent of new production capacity in recent years (Mayer & Fajarnes, 2005: 11).

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Firstly, it needs to be established whether other developing countries share the shift from national to

private ownership forms in the extractive industry. Table 5.1. provides such an overview of

ownership forms over time.

Table 5.1.: Percentage of oil and gas production undertaken by foreign companies (by region)

1995 2005 Change

Developed economies - 36.0 -

- Europe 46.8 35.9 -10.9

- North America - 34.0 -

Developing economies 17.8 18.9 1.1

- North Africa 12.0 26.4 14.4

- Sub-Saharan Africa 35.4 57.2 21.8

- Latin America & Carribb. 10.7 18.4 7.7

- West Asia 9.4 3.5 -5.9

- Other Asia 40.5 32.1 -8.4

- S.E. Europe and CIS 2.5 10.8 8.3

Source: Jones, 2008: 11

It should be noted from the figure that in the short period of ten years, there has been a major shift

from national to private ownership form in sub-Saharan Africa. Not only is the shift most

pronounced in this region, the level of private ownership is also vastly larger than in any other

region. Latin America has also experienced a shift from national to private ownership forms, albeit

to a much lesser degree. However, most of the developing countries rich in natural resources are

today situated in the sub-Saharan African region (Mayer & Fajarnes, 2005), and therefore it would

seem that the tendency traced in the Zambian case is in fact part of a larger shift from national to

private ownership in the developing world, a point echoed by other research findings (Jones, 2005:

67-70; Campell, 2003: 4; Bush, 2004: 186).

Secondly, it needs to be established that the shift from national to private ownership forms has also

been accompanied by liberalization of the regulation of the extractive sector, another key

characteristic from the Zambian case. Support for this can be found in numerous other studies

(Breisinger & Thurlow, 2008; Bridge, 2004: 407; Campell, 2003; Bush, 2004). Overall, more the 90

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states have liberalized their mining laws since 1985 (Bridge, 2004: 407). This leads Breisinger and

Thurlow to reach a conclusion somewhat similar to that found from the Zambian case study:

―Many of the arguments surrounding resource booms and mining-led growth were

informed by pre-structural adjustment conditions in Africa, when mines were state-

owned and their profits (or losses) greatly influenced government revenues.

However….difficulties in taxing foreign mining companies may prevent governments

from turning natural resources into public investments…‖ (Breisinger & Thurlow,

2008: 1-2)

While this point has not yet played any major role in the academic discussions on the

resource curse, it has on the other hand played a substantial role among NGOs focussing

on the extractive industry in developing countries. Here, several reports have been

produced showing that a key constraint on resource-rich developing countries today is that

they are not capturing an adequate tax-take from their extractive sector (Christian Aid,

2007; Christian Aid et al., 2009; Christian Aid, 2009; NACE, 2009). The reports cover in-

depth case studies of such diverse countries as Bolivia, the Philippines, Peru, Guatemala,

Honduras, Ghana, Tanzania, Sierra Leone, Malawi, South Africa, the Democratic Republic

of Congo, and Zambia. Common to their findings is that the tax code has been liberalized

in recent years in these countries, with a sharp reduction in tax revenue from the extractive

sector as a consequence (ibid.). While a good overview of tax revenue from all developing

countries rich in natural resources is still lacking, the work cited above provides tentative

evidence showing that the tendency towards more liberal tax codes and a marked decrease

in government revenue from the extractive sector is in fact part of a larger tendency in the

developing world.

Thirdly, the experience in Zambia showed that the move towards privatization and liberalization

was to a large degree externally driven by the World Bank and IMF. Again, it seems that there is

some evidence showing that this finding can be generalized to many other developing countries.

Thus, it has been widely recognized that the IMF and World Bank has been the key driver of the

changes in the extractive industry, especially in sub-Saharan Africa (Campell, 2003; Bush, 2004:

186; Christian Aid, 2007).

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Lastly, if the experience from Zambia is to be inferred to other developing countries rich in natural

resources it also needs to be demonstrated that the effects of the traditional resource curse has not

been present during the current boom in oil, gas, and mineral prices. To assess this, it will be needed

to demonstrate that macroeconomic performance has been good during the current boom, as was the

case in Zambia. Interestingly, such evidence also exists. In an OECD paper on the macroeconomic

effects of the current boom in natural resource prices the authors note that on debt, inflation,

currency devaluation and a host of other factors, both Latin American and African resource-rich

countries have performed surprisingly well (Avendaño et al., 2008). In fact, evidence suggests that

the resource-rich economies of sub-Saharan Africa has outperformed their Latin American

counterparts in recent years when focusing on macroeconomic performance (ibid.: 30). Equally

telling, sub-Saharan Africa has been on a high growth trajectory since the price of several natural

resources began booming in the early 2000s. The change in growth for the region has been most

pronounced in the countries that are reliant on natural resources (Arbache & Page, 2009: 21).

According to a Mckinsey report, 24 percent of the growth between 2002 and 2007 in Africa is

attributable to growth in the extractive industry (McKinsey, 2010: 2). Equally, the current boom

does not seem to have been accompanied by a new interest in ISI and state-led development in these

countries. It would therefore seem that the traditional resource curse, with its focus on rising

inflation, debt, and state-led industrialization, is not a key feature during the present boom in the

prices of natural resources.

Taken together, the above has provided evidence, albeit tentative, showing that the experiences

from Zambia might be relevant for many other resource-rich developing countries. Many resource-

rich developing countries seem to mimic the patterns and experiences found in the case study of

Zambia: High growth and stable macroeconomic performance, under a privatized and liberalized

extractive sector, pushed through by the IMF and World Bank, with a small tax-take from the sector

as a consequence. This is indeed a markedly different pattern than that of the resource-rich

developing countries of the 1960s and 70s. And perhaps more importantly, it is a markedly different

pattern than one would expect from reading the literature on the resource curse or by judging the

donor initiatives that seem to be stuck in the models promoted by this literature.

By pointing to these patterns I am not claiming that all resource-rich developing countries share the

experience of Zambia. To be sure, some of the biggest exporters of natural resources - such as

Angola, Equatorial Guinea and Gabon - are most likely better understood with reference made to

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the old narrative of the resource curse, with its focus on large revenues accruing to the state and

corruption and inefficiencies as a consequence. However, these high-profile cases should not blind

us from the processes taking place in many other resource-rich countries in both sub-Saharan Africa

and Latin America17

. Thus, while the resource curse claims validity over time and space, the

analysis presented here questions whether the changes in terms of privatization and liberalization

has not limited the validity of the resource curse over time.

If the above is accepted, this has wide implications. Bellow I will focus on two such

implications in developing the last two hypotheses.

5.2.2. Hypothesis 4: History matter

The idea of a generalized resource curse hinges on the premise that we can infer from the past to the

present, as Collier rightfully acknowledges in passing:

…the current boom [in commodity prices in the post-2000 years] is, if past behavior

is repeated, likely to have strongly adverse long-term effects… (2008: 29, own

highlight)

However, if we can infer the results from Zambia to a wider population of developing countries, as

argued above, it suggests that past behavior cannot be assumed to repeat itself in the countries that

have opted for private ownership and liberal regulation of their extractive sector. This highlights a

potential problem inherent in the resource curse in terms of being able to infer over time. I will

argue that this problem stems from a methodological shortcoming in the curse literature.

Thus, in order to infer from the past to the present and beyond, one ideally needs to demonstrate

that one‟s hypothesis holds true for several periods of time. In this regard it is problematic that

almost all studies on the resource curse, whether statistical or case studies use almost the same time

series to test the hypothesis, namely the period of 1960-2000 (Oskarsson & Ottosen, 2010: 1068).

As with the price of copper, most commodity prices have been declining since the 1980s until the

early 2000s and therefore the period essentially tests the same phenomenon, namely the boom in

commodity prices during the 1960s and 70s. This goes against the warning that King, Keohane and

Verba have given in their seminal book on designing social inquiry:

17

The resource curse literature has previously been criticized for focusing too much on the worst-performing cases

(Basedau 2005: 31).

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―We should always try to… avoid using the same data to evaluate the theory that we

used to develop it‖ (1994: 46)

This raises the question of whether the resource curse is a historical phenomenon that is bound to

the boom in commodity prices in the 1960s and 70s, or whether it holds true irrespective of time.

This is deemed highly relevant as a few studies are beginning to indicate that some of the negative

effects predicted from the resource curse do not hold true in more recent years (Oskarsson &

Ottosen, 2010; Jones, 2008: 28pp.).

If we can infer the results from Zambia to a wider population of developing countries, as argued

above, it suggests that the resource curse theory might not be relevant for a wide number of

resource-rich countries today, where many have adopted private ownership and liberal regulation.

This is especially important in terms of policy implications of the resource curse, as it can be highly

problematic to prescribe solutions based on a misguided understanding of what the problem is. The

donors tend to see the problem of resource-wealth as a problem of state-failure in terms of handling

revenue (Karl, 2007: 270), which does not seem to be the largest problem in Zambia and perhaps

many other developing countries. This is in no way to say that this is not an important area for

reform, but just to point out that it might not be the most important one for the countries whose

largest problem is not that they receive seemingly endless stream of revenue, but rather that hardly

receive any at all.

In promoting the hypothesis that history is of importance, however, I not only aim at the shift in

ownership and regulation that has marked recent years. History also matters in a much broader

sense, both in terms of ideology, and the strength of different political actors. I will explore this

argument by returning to the Zambian case to show how these factors had importance.

In 1962 opposition leader in Zambia, Harry Nkumbula, is quoted saying ‖Kaunda is not carrying

out his own policies. They are Nkrumah‘s ideas‖ (quoted in Macola, 2008: 29). While polemic, the

fact of the matter is that Kaunda did not decide on his policies in a vacuum when he became the

first leader of independent Zambia. The opposition charged him with being influenced by Kwame

Nkrumah, the first president of independent Ghana18

. Nkrumah‟s blend of nationalism, socialism

and anti-colonialism was to become very popular during the move towards independence and

18

Ghana gained independence in 1957 as one of the first sub-Saharan African countries and Nkrumah‟s ideas and

actions were followed closely by many aspiring African leaders around the continent.

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immediately after in Africa. Thus, the period around the struggle for independence and the early

post-colonial years came with a strong ideological preference for state-led industrialization, and

national control over the means of the production, especially in the strategically important

extractive sector.

In the resource curse literature the theory is usually dated to the late 1980s. This is misleading.

Decades before this writing, the idea of a curse from resources was already widespread, albeit the

explanation for this was much different. Nkrumah himself can be taken as an example. Thus, long

before Karl coined the term ―the paradox of plenty‖ (1997), synonymous with the resource curse,

Nkrumah wrote of this paradox:

―Africa is a paradox which illustrates and highlights neo-colonialism. Her earth is

rich, yet the products that come from above and below her soil continue to enrich,

not Africans predominantly, but groups and individuals who operate to Africa‘s

impoverishment‖ (Nkrumah, 1965: 1)

Likewise in Latin America, writer and activist Eduardo Galeano wrote of ―the black curse of

petroleum‖ in 1971 (Galeano, 1997: 156). According to Galeano poverty was an outcome of the

continents natural resource abundance:

―Our wealth [Latin America‘s] has always generated our poverty by nourishing the

prosperity of others – the empire and their native overseers. In the colonial and

neocolonial alchemy, gold changes into scrap metal and food into poison‖ (Galeano,

1997: 2)

These ideas drew heavily on the dependency school of development, highly influential in

these years (Leftwich, 2000: 60-63). Common to these thoughts were the ideas of foreign

exploitation, based primarily on the exploitation of the poor country‟s natural resources.

Nationalization of the natural resource sector was therefore seen as a way of breaking this

―structure of plunder‖ (Galeano, 1997: 205).

To be sure, these ideas were also present in Zambia, as the opposition pointed out in the

quote above. The ideological climate of the day might therefore very well have been a

factor in promoting the types of policies that were pursued in the first period.

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Equally, it can also be claimed that behavior during the second boom was in some part

shaped by the ideological climate of the day. Thus, as the economic plight of the many

developing countries that had pursued statist policies during the 1960s and 1970s became

visible in the 1980s, a countermovement against these policies was initiated. This

countermove was in large part led by the World Bank and IMF, who became increasingly

influential in setting the development agenda in the 1980s and onwards. During this period,

―structural adjustment‖, a euphemism for neo-liberal economic reform, became the

demand from these institutions (Leftwich, 2000: 49-50). Likewise, the fall of the Soviet

empire and the discrediting of socialist thinking in its wade made neo-liberalism more

dominant. The WTO has at the same time institutionalized liberal trade rules which the

developing countries are constrained by (Wade, 2003; Chang, 2003). To expect that ISI

and state-led development would re-emerge in such an institutionalized ideological climate

might be misguided. For many developing countries it would mean breaking WTO rules as

well as risking donor finance.

These factors again are to be found in the Zambian case study. Thus, the neo-liberal reform

drive was not only a consequence of the World Bank and IMF, but also had some support

in the MMD government, who accepted the neo-liberal explanation of past economic

decline and internalized the ideas in this agenda. Thus, there seems to have been a learning

process from the 1960s to the 1990s, which discredited the statist development model of

the first boom, as well as pressure from the IMF and World Bank to follow the neo-liberal

development model.

Taking these points together, it would seem that history plays a role in terms of the

conditions that are in place before a boom occurs. It is therefore problematic that the

resource curse assumes that past behavior is repeated in an endless vicious cycle, as this

does not seem to be the case. Instead, it seems that each boom period has been

characterized by its own ideological climate, which has been shaped and enforced by

actors such as the WTO, IMF, World Bank, and the state. This has made some actions and

policies more likely than others. To expect statist development ideas, such as ISI, to

resurface during the current boom might therefore be misguided.

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5.2.3. Hypothesis 5: The problem of natural resources needs to be reframed

The analysis showed that limiting unearned income through liberalization of the tax code had the

effect of removing the hurtful political and economic dysfunctions described by the resource curse.

Macroeconomic management has been exemplary, and the copper sector has rebounded through

foreign investments after years of neglect and mismanagement. Furthermore, in exploring whether

the findings from Zambia could be inferred to other countries it was also noted that resource-rich

developing countries have fared much better during the recent boom in terms of macroeconomic

performance. Are privatization and liberalization then the solution to the resource curse? As I have

argued in the analysis, this is not the case. The situation in Zambia is not sustainable, with the

country being drained of scarce resources needed to promote development, while the extractive

sector is externalizing costs of pollution, maintenance of infrastructure and the like to society.

This raises the question of whether the current understanding of the problems involved in resource-

rich countries is adequately understood. As has been documented in the theoretical section, the

resource curse literature promotes the idea that seemingly endless streams of unearned income is the

problem as it distorts the political system, while the arguments made above have suggested that it is

the exact opposite which is the problem for Zambia and other developing countries – namely that

they are hardly receiving any revenue from their natural resources. Needless to say, this makes quite

a difference in terms of policy implications.

This leads me to promote my fifth and final hypothesis, namely that the understanding of what

constitutes the challenge for resource-rich developing countries needs to be changed. Rather than

seeing the problem only as one of managing large amounts of revenue from the extractive sector I

would argue that the experience of Zambia and other developing countries reminds us that the

challenge to resource-rich developing countries is not only to ensure that they spend the revenue

from the extractive sector wisely. It also includes a focus on capturing an adequate amount of the

rents being generated by their extractive sector.

Stating the problem of natural resources this way has large implications. It suggests that policies

which seek to promote sustainable development in resource-rich developing countries also need to

pay attention to adequate regulation of the sector, an area so far neglected by academics. And an

area in which the donors, most notably the IMF and World Bank, have helped bring about the

unsustainable situation found in present day Zambia and elsewhere.

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6. CONCLUSION

This thesis has pointed to a flaw within the resource curse literature. While the analysis showed that

privatization and liberalization of the extractive sector have the potential to radically alter the

resource curse phenomenon, the literature on the curse has so far neglected this area. While the

traditional resource curse specifies that the ―paradox of plenty‖ arises as the state receives

seemingly endless amounts of revenues from the extractive sector, the problem in present-day

Zambia is the exact opposite; it hardly receives any revenue from the sector and as a consequence

society is not reaping the benefits that the current boom could have provided. While

macroeconomic performance has been improved after privatization and liberalization, it was

therefore argued that the current model is not sustainable in terms of development.

From the current resource curse literature it is difficult to understand why this state of affairs has

come about. After all, this literature assumes that politicians in resource-rich countries with weak

institutions will seek to capture rents from the extractive sector in order to redistribute them to gain

politically. Sense was made of this puzzle by analyzing the politics behind the two separate booms

in post-independence Zambia. Donors and the mining MNCs proved to be crucial in bringing about

this new situation. These actors have been notable only by their absence in much of the

contemporary writing on the resource curse.

The thesis developed five hypotheses that have large effects for both the theory of the resource

curse, and potentially for other resource-rich developing countries. Firstly, unearned income does

seem to be the crucial independent variable that sets in motion the negative effects associated with

the traditional curse literature. However, unearned income is also a dependent variable in itself, as it

is shaped by regulation and ownership within the extractive sector. From these two insights arises

the need to focus on ownership and regulation in resource-rich developing countries. Secondly, the

good governance type institutional approach adopted by the mainstream resource curse literature

and many donors was found lacking. While institutional quality was low in both periods, the

outcome in terms of managing the two booms still differed radically. It was argued that this was

more a result of the different political dynamics in the two periods, and thus highlights a need to

acknowledge the interactions between institutions and politics. Thirdly, it was hypothesized that the

political actors involved in resource-rich developing countries matter. Only by adopting such a

focus could the decision to privatize and liberalize the copper sector be understood, as well as why

the unsustainable model has been kept in place throughout the second boom.

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The last two hypotheses were focused on implications which might be drawn if the results from

Zambia can be inferred to other resource-rich developing countries. This was found to be relevant

as there were some indications that the results are in fact inferable. The fourth hypothesis therefore

argued that history matter in terms of the resource curse. It is possible that the resource curse is

primarily a historical phenomenon associated with the boom of the 1960s and 70s, where state

ownership prevailed. The ideological climate during that period, contrasted with the ideological

climate of today, provided further support for this hypothesis. Lastly, the fifth hypothesis argued

that the problem of resource-wealth in developing countries needs to be reframed. So far the

problem has mainly been understood as one of how to manage the revenue from the extractive

sector. However, there seems to be a need to acknowledge that a first step in promoting

development in resource-rich countries is to ensure that these countries capture an adequate share of

the rents form the extractive sector.

Taken together, these five hypotheses provide a new frame for understanding the resource curse. If

these hypotheses are correct, they have large policy-implications. However, it might be wise to

exercise some caution in drawing new policy-prescriptions. There is a need to study the issues

raised by this thesis in more detail, and to tests the hypotheses on other cases, as the single case

study methodology limits the potential for inference, especially in terms of inferring to other

countries.

Let me end the conclusion by returning to the motivation for this thesis, namely the potential for

development that the current boom in the price of natural resources has brought about. While the

resource curse cautions us in being too optimistic about the developmental potential of the boom,

this thesis has shown that the negative effects of the resource curse are in no way deterministic. In

discussing whether the results from the analysis could be inferred to other resource-rich developing

countries, it was noted that macroeconomic performance has been much better during the current

boom, both in resource-rich countries in sub-Saharan Africa and Latin America. Furthermore,

overcoming the resource curse does not necessarily seem to be predicated on the difficult and long-

term task of building institutional quality. However, at the same time the outlook for development

under a fully privatized and liberalized extractive industry was argued to be weak, as the model

primarily benefits foreign investors. In present-day Zambia the mining boom might even have a

negative impact on long-term development, in part due to the costs externalized to society. As such,

it would seem that there might be a need to change the distributional balance between foreign

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investors and the host countries in which they operate if the current boom is to provide long-term

developmental gains. If a better balance can be struck without compromising the good

macroeconomic performance there would seem to be hope for cautious optimism on behalf of the

millions of poor people living in resource-rich countries.

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