To what extent will natural resources contribute to Zimbabwe’s economy?

By Hopewell Mauwa

 Have Zimbabweans become so myopic that they expect a miraculous return to economic prosperity post President Robert Mugabe era?

There seems to be a common misconception amongst us Zimbabweans that replacing the current government will suddenly turn the country into a bread basket again.

Granted, political instability, corruption and erroneous policy execution by government in recent years have left the country in a ravaged state with poor economic growth prospects.

But does the absence of corruption and political instability guarantee a return to the kind of economic prosperity often promised by opposition politicians?

Indeed, a salient fact often muted from national economic debate is how exactly the country would position itself for competitiveness in the global economy post attaining stability.

Zimbabwe is endowed with vast natural resources, but so are many other countries in the world.

How the country produces, consumes and trades with other nations has important implications on the overall value we ultimately extract from our resources.

It is a fallacy to boast about natural resources in isolation in a globalised world where the factors of production — land, labour, capital and entrepreneurship — have been internationalised.

The often cited beacons of successful extractive industry based economies — Canada, Australia and Norway — all have a considerable grip on all factors of production, not just the “free” resource (land).

Good institutions have played a key part, but crucially they have not let resource dependence undermine their long run economic growth.

What is often ignored about these countries are the underlying equally large-sized home grown technology, engineering and financial services sectors, which play an even bigger role in building cross-sector synergies and consequently their national competitive advantage.

One of the reasons why many African countries fail to negotiate better deals for their mining sectors is that they often only bring one component of the four factors of production to the table.

That places them in a weak and often “exploitative” relationship.

Take a simplified case of a copper mine in Zambia, for example.

The Zambian government offers the mine (land); Rio Tinto finances the development of the mine (foreign capital) and, of course, runs the project as a multi-national company (foreign entrepreneur).

Now Rio Tinto’s strategic decisions are run from the headquarters of the Anglo Australian company (skilled labour) relegating Zambia to supplying mainly operational, semi-skilled and unskilled labour.

Further, the mine itself is capitalised with property, equipment and technology from foreign firms. Financing facilities are meanwhile arranged by foreign institutions in London or New York.

The major economic benefits therefore come down to royalties and taxes, of-course, but also low value non-sophisticated operational activities.

It is a vicious cycle indeed; repeat this process over many years and it is apparent why some “resource-rich” countries are perennially impoverished.

Meanwhile, other countries with no natural resources such as Singapore, Hong Kong, South Korea continue to thrive economically.

In Africa, Botswana is often cited as a perfect template on how natural resources should be managed, but what exactly has driven their success?

Under the Debswana model, De Beers and the Botswana government have equal equity in the venture.

Careful analysis shows that the successes of the venture have historically hinged on good governance and effective government priorities aided by a small population more than the merits of the deal itself.

Patience has been a key part of Botswana’s tactics.

It has taken nearly half a century for Botswana to become an equal equity partner in the venture and to bargain for some limited technology transfer and value-added services as well as some human capital development in the form of select higher skilled jobs being domiciled in the country.

Its weak bargaining position emanated from offering just one component of the four factors of production in negotiations.

To renegotiate a better deal, Botswana leveraged the fact that their mines are globally among the highest quality and low cost to operate, their long relationship with De Beers and of course their relatively stable political climate.

Similarly, Zimbabwe will need to offer a well-crafted unique value proposition to negotiate favourable deals, otherwise benefits will remain limited.

This is not insurmountable, but remains opaque at the moment.

Another hyped policy decision is on beneficiating minerals to manufacture value-added products.

It is no coincidence that most of the beneficiation of minerals takes place in the developed world closer to markets where the final products are consumed.

The underlying economic principle being that it is more cost efficient to transport low value added products than to transport high value finished goods.

Global supply chain networks have thus been established based on that principle with huge cost implications of tinkering with those mature value chains.

To business executives, a decision to establish a refinery in a specific country is seldom political, but justified by commercial viability and pragmatism.

Multi-national mining companies are often faced with making choices on refineries locations.

In that respect, Zimbabwe will compete with other industrial hubs in China, India and elsewhere.

The infrastructure challenges Africa face such as energy generation capacity, the absence of adequate transport systems and dilapidated rail networks in most cases render such projects uncompetitive, particularly when the final products are intended for export.

In the absence of vibrant domestic or regional consumption, significantly expanding mining value-added manufacturing capacity appears a long-term aspiration rather than something that can be realistically achieved in a few years.

So what will ensure that Zimbabwe does not fall into recurring strategic pitfalls where resources perpetually benefit foreigners ahead of local communities?

Clearly political stability, curbing corruption and good institutions are crucial initial steps.

Beyond that, however, the strategies articulated by most political parties lack depth and clarity on how they will counter the market forces stacked against our negotiation capabilities in the global context.

It appears constrained capital availability is the easy excuse to accept the status quo and to offer better concessions to foreign firms.

That certainly is a recipe for more frustration amongst locals as that will lead to unfulfilled promises.

The nation needs to dig deeper; without carefully thought out structural reforms that tip factors of production in our favour supported by coherent cross-sector long term strategic goals, harnessing the full benefits of our natural resources will remain an unfulfilled dream.

About the Author: Hopewell Mauwa is an economic analyst andglobal natural resources strategist based in London.He writes in his personal capacity and can be contacted on [email protected]