A major criticism of the extractive industries in developing countries is that they leave a hole in the ground and not much else. In a nutshell, the argument goes, the lucrative minerals beneath the soil generate significant wealth for shareholders, little for workers, and even less for the communities left behind.
Certainly, there are many examples of resource-rich countries whose citizens are mired in poverty. But there are also many examples where the opposite holds true. So, what factors determine whether a country’s natural endowment will lead it to flourish or flounder?
There is much research on the phenomenon of the ‘resource curse’. As a rule of thumb, if institutions – those formal and informal frameworks that govern our behaviour in society – are weak at the time of discovering resources, the social and economic outcomes for the broad mass of the people tend to be minimal.
One critical institution that can alter the path towards a curse is secure property rights. For countries to avoid post-mining ghost towns, property rights are the critical institutional ingredient to attract economic activity that transcends mining. Few examples exist. Johannesburg is one – it did not even have a river. Gold was everything.
In Zambia’s remote North-Western province, the town of Kalumbila is a start-up with the same intentions and potential of a Johannesburg. Home to First Quantum Minerals’ (FQM) Sentinel copper mine, built at a cost of $2.1bn, Kalumbila is meticulously planned. While it has just north of 5,000 inhabitants at present, its growth potential is significant if its broader institutional ecosystem provides the right support. It has a world-class airport, for instance, and proximity to export markets in the DRC and Angola. Housing is high-quality, and the facilities – schools, hospitals and leisure clubs – that make it attractive for skilled staff to come and live in a remote part of the Zambian bushveld are in place. Part of the pre-design engineering was that the town would be owned not by the mine but by the Kalumbila Town Development Corporation (KTDC), even though it was funded by FQM to the tune of nearly $200m. This institutional arrangement was designed to attract private investment and land acquisition.
There is a snag, however, and that is bureaucratic delay in the granting of land title and commercial permits to investors. At present, only 6% of land in Zambia is titled (only 160,000 title deeds across the country); the rest is under communal tenure and customary law. A new draft land policy is in motion, which aims to ‘streamline the delivery of land administration services and management in the development of the country’. It ‘seeks to strengthen land tenure security and enhance sustainable and productive management of land resources…’ The House of Chiefs, however, rejected the document shortly prior to its submission to cabinet for approval. Chiefs tend to view titling and security of tenure for individuals as a displacement of their traditional power. They have stated that the policy amounts to theft of their land.
At present, only 6% of land in Zambia is titled (only 160,000 title deeds across the country); the rest is under communal tenure and customary law.
At Kalumbila itself, a seven-year process of acquiring presidential approval culminated this year when the mine, the town and the industrial zone were successfully converted from customary to statutory leasehold. In other words, the permission to convert the land from block title into individually recognised plots was granted. This is a serious step forward for development because individually titled land, or homes, are secure assets that can be used as collateral for raising finance for other ventures. Now it is the speed at which titling occurs that is the major hindrance. Across the country, there are only two titling centres under the Ministry of Land, with the main centre in Lusaka. Resultant administrative delays and bureaucratic inefficiency undermine investors’ ability to plan, and increases the transaction costs of doing business in Kalumbila and the rest of the country.
Michael Kabungo, the leading mind behind the KTDC, explains:
“The state’s lack of capacity to provide title deeds faster means that a real opportunity for economic growth is missed, by slowing down the rate at which investment can flow in and drive the multiplier effects from mining. It also means that many people end up losing out, as they remain unable to use their property as a collateral-raising asset.”
Unlocking the title-deed bottleneck could also accelerate investment growth into industrial development, which is where the real job creation happens. Kalumbila’s urban designers have, for instance, had the foresight to plan an industrial zone. One of its early wins was to attract ME Elecmetal, a leading Chilean mine supplier, to build a $40-million mill-ball manufacturing facility. Mill balls are used to crush copper ore prior to further processing. The plant therefore represents another crucial component of escaping the resource curse – developing links between mining and other industrial activities. It will employ roughly 150 local taxpayers and procure goods and services from local companies, reducing Zambia’s trade deficit in the process and improving the mine’s productivity efficiency. The mine will no longer have to wait for supply from China for weeks on end.
Investment of this scale is a potential catalyst for a virtuous economic cycle. Just on three months ago, for instance, the major shareholder of an Australian engineering company visited the industrial zone and expressed interest in building a pipe-extrusion factory nearby. But titling will need to happen faster if this multiplier effect is to gain traction.
The Business Monitoring Index (BMI) has revised its copper price forecast up to $7,000/ton for 2019 (up from $6,300/ton now), but has noted rising downside risks for Zambia stemming from a ‘worsening regulatory environment’. In the World Bank’s ‘Doing Business’ rankings, which measure the ease of doing business in a country, Zambia ranks 85th (out of 190) in 2017. The rankings are a benchmark for the regulatory environment that concerns credit rating agencies. Of 48 countries in sub-Saharan Africa, Zambia comes 30th for ‘Registering Property’ (149th globally) and 22nd for ‘Enforcing Contracts’ (128th globally). These are two particularly telling indicators regarding perceived security of tenure in Zambia. More generally, in the World Bank’s Governance Indicators, Zambia declined on each of the six criteria from 2015 to 2016. ‘Government effectiveness’ and ‘Regulatory quality’ are the areas in which Zambia scores most poorly and saw the most marked deterioration.
In their classic 2012 book, Why Nations Fail, economists Daron Acemoglu and James Robinson mention property rights a cool 81 times. In perhaps the starkest example of the legacy effects of differential property rights regimes within one country, they describe the border between the Transkei (a former South African ‘homeland’) and Kwazulu-Natal. ‘To the east…wealthy beachfront properties on wide expanses of glorious sandy beaches … the whole area reeks of prosperity. Across the river, it is as if it were a different time and a different country’ (pp. 464-465). Private property rights characterise the east side of the Great Kei River, while insecure communal tenure continues to characterise the west side of it.
Their general conclusion holds an important lesson for Zambia, and for Kalumbila if it is to spearhead Zambia’s rise out of the resource curse. ‘Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity’ (p. 138).