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Dead Aid – Dead Right or Dead Wrong?

[Anthony Lipmann reviews the book ‘Dead Aid’ by Dambisa Moyo]

So, is Dambisa Moyo right about Africa’s aid dependency…or just heartless?

In 2000, the late President Chiluba, under pressure from the World Bank and IMF was faced with a country that could not feed itself. The price of the country’s main export, copper, at 86 cts per lb ($1900 per mt), was below the cost of production and the country was in default. Zambia was virtually bust.

As ever, the West was ready with the medicine – privatisation of the copper industry in return for loans. If it worked, Zambia could look forward to growth and stability; without it, perhaps Africa’s most peaceful state would become “Zimbabwe II”. Eleven years later what does the experiment tell us?

Privatisation was certainly good for foreign mining firms who bought into the industry. One of the most notable of these was Glencore International AG who bought Mopani Copper Mines (MCM) for about $450 mln. The same plant today sees throughput of copper worth about $1.8 bln per year and was one of the key assets behind Glencore’s successful float in May 2011, the largest IPO in history. Meanwhile, Vedanta, owner of Konkola Copper Mines (KCM), has been able to leverage up its Zambian copper assets to become one of the leading members of the FTSE-100 and First Quantum’s success in Zambia has led it into the Congo.

In 2000 the value of all copper exported from Zambia was worth no more than $400 mln, while today it is nearer $8 bln. Prices generally are much higher caused by the financialisation of commodities which took place in the meantime and demand from China.

The mining industry certainly called it right, but did Zambia?

According to Moyo’s thesis, Zambia, by taking the path of foreign partnership, opening up state-owned business to competition and encouraging overseas investment was taking the Dead Aid choice – eschewing aid in favour of accepting the free market

Zambia is richer today, better fed, more educated and on some kind of a path to growing a middle-class with aspirations for the working life little different to anywhere in the world. If you ask a child in a Zambian urban town what he wants to do when he grows up, it is to become a doctor, engineer, accountant or teacher.

But somewhere along the line the Dead Aid theory has failed Zambia too.

In 2000 under ‘Development Agreements’, written at the time of privatisation, the mining houses obtained tax breaks in return for commitments to revive the copper industry, clean up legacy pollution and maintain the workforce. This in effect meant that while the miners could be free to enjoy the upside of better copper prices, the small print meant that the old state was still shouldering the costs of infrastructure.
That would be fine, if the Zambian state had a robust system of taxes.

What was not foreseen by the Zambian state and not provided for was for a tax system that would allow the state to share in the success of the industry. The tax breaks were all well and good in order to encourage investment but the Zambian Revenue Authority also needed to have a fair revenue or else it could be said that the state had just ceded to fiscal colonialism all over again. The main levers of power were not wielded in Lusaka but in Zug, London and Toronto.

The blunt fact is that during the decade of highest copper prices in history, precious little tax has been collected by the Zambian Treasury, while infrastructure failed to improve unless it was of direct use to the mining houses themselves. Social projects, once provided by the paternalist state, and cherished by Zambians, have lapsed, so that schools and hospitals see only a trickle of funding.

If we take a town like Mufulira, at the heart of Zambia’s copper belt, you can see the cure in action. Here, in the urban landscape that grew up around the migrant workers who congregated in search of work at Zambia’s richest and deepest copper mine from the 1930s, the largest influence on people’s lives is no longer the nation state but the private company who owns Mopani Copper Mines (MCM), Glencore.

In Mufulira the benefits of privatisation are not obvious. Rates of malaria, TB, HIV-AIDS have decreased, but not thanks to privatisation, rather to US Aid and Bill Gates, whose philanthropy have provided on the one hand anti-retroviral drugs to the poorest of community hospitals and on the other mosquito nets to rural areas and the poor. Pollution in Mufulira is worse than it was in 2000 because, although the foreign-owned mining company provided a new smelter with the ability to capture sulphur, it did not upgrade the converters which still emit direct to the atmosphere. The increased output means that the net quantity of sulphur released into the air is greater today than it was in 2000. (Under the development agreement it provided that all sulphur would be captured by 2015, but why wait?)

In short, Mufulira does not look like a town responsible for the export of 200,000 mt of copper or, at today’s prices, almost $2 bln of the metal. To look around you would never know it.

Under Moyo’s definition of aid, loans which become grants were part of the problem, where no incentive existed for the recipient to become a good debtor. She cites the billions given by the U.S. to Zaire in the 1980s to curry geopolitical favour when it was feared that Africa’s soul could be lost to communism. She cites the vested interests of aid agencies and NGOs whose machinery removes choice and decisions from Africans. She cites (without mentioning the word) kleptocracy, made easy by the way in which donor countries dole out aid to central governments who remain unaccountable to their populace. She cites Western protectionism in agriculture, so constructed that aid to US farmers encourages excess production of food which is then dumped in Africa, destroying the economics of local production. Similarly, the European Common Agricultural Policy places anti-dumping duties on imports from Africa, denying access to the European market for African produce.
So would Moyo have been a privateer in 2000 or would she have allowed the weakened post-independence Zambia to collapse and recover under its own free will? And was there any choice?

For sure, the privatisation of the copper industry in Zambia has produced ambivalent results, on the one hand financial colonialism by companies wielding more power than a sovereign country. Corporate social responsibility (CSR) has been minimal and, when the late President Levy Mwanawasa, suggested recovering some lost revenue via windfall taxes, the objections from miners could be heard all round Africa. On the other hand, an industry that was dead or dying in 2000 is now a world leader, with a plurality of investors from all over the globe and more jobs and investment in infrastructure even if, in the case of the Tazara Railway, it only comes with Chinese money in their self – interest to move ore and other exports out of Zambia more quickly.

Perhaps there was no alternative. Had it been possible for Zambia to issue bonds, to gain the confidence of the international community for a home-grown, long-term programme to re-develop their copper industry in partnership with, rather than tutelage from, the West, how different things might have been. Perhaps it would have given government the chance to be more accountable to its people, to bring in a mixed economy, to move copper revenues into infrastructure and services, to pay for networks of fibre optic lines, solar energy parks, better roads, improvements to schools and hospitals, actions taken incrementally and not begged for via aid packages from the West; actions to bolster and grow a middle class, to develop the habit of tax-paying, however small, to develop accountability of the executive in the way in which tax is spent; to encourage the sanctity of title and create property-owning classes. All this could have been possible – but in reality, what was the chance in 2000?

Zambia’s experience, like that of so many other African countries, is to be caught between the two choices of exploitation if opened up economically, or under-development if not.

However, as any traveller to Zambia or Mufulira will see, despite the fact that this nation remains short-changed by the West, a new generation is beginning to find its voice. Just like anywhere in the world, the same fibre optic cables that were laid for mining houses now connect the urban young to the outside world and uncensored information. Farmers rely less on central selling organizations, mobile phones allow people to transfer money to each other as phone credits that have formed a currency sub-culture avoiding banks and their excess charges. Private business is beginning to germinate.

Dambisa Moyo is Zambian, so her thesis comes from real knowledge of a country where the 12 million people live on an average of $1 per day and where life expectancy is 47 years. She comes from a place that was once so trapped in a cycle of poverty, that the prospect of achieving just one of the UNs Millennium Development Goals by 2015 remains a mere pipe-dream. She has enjoyed a privileged upbringing, taken education at Oxford and Harvard, and worked with one of the world’s most famous or infamous financial institutions, Goldman Sachs. Could she be accused therefore of merely being a ‘nestbeschmutzerin’ – a soiler of her own nest?

As we read again of famine in the Horn of Africa the thesis of Dead Aid, that aid does not work, is perhaps proved again – that however much aid went into Ethiopia as a result of Live Aid, here we are back again in 1984. But Moyo is at pains throughout the book to exclude emergency aid from her theory.

The lingering doubt for me, and perhaps for others who have visited places like Mufulira, is that the odds are just stacked too far against Africa in the face of large corporations who own Zambian assets, the very earth under Africa’s feet, the polluted air above it, and the water that runs through it.

My solution is as follows and is to be found close to home. Our efforts need to be directed towards holding global corporations to account, especially those companies who come to London for capital-raising reasons. Under laws such as the Companies Act 2006, for example, it is a requirement to present an environmental audit of world operations, including those in developing countries. If companies choose to list here then why should they not abide by the values that we require?

The environment is one issue but tax is another. In Zambia it is too easy for multi-nationals to declare costs in Africa which effectively make their companies look loss-making or not hugely profitable. In the case of commodities-based nations who do not add value there is only one instrument that works, which is a tonnage tax. Although such a tax needs to be balanced at a level that allows the nation state to attract and maintain foreign investors, it also needs to be high enough to share in the wealth that is exported. Imagine for a moment a tax of 10% on the 800,000 metric tons of copper that left Zambia one way or another in the last 12 months. At US$9000 per metric tons that would be $700 mln which is the minimum fair contribution that copper should be making to the Zambian treasury.

Unlike Moyo, I do still believe in aid, but I believe even more in pressure on London listed companies busy profiting from Africa while not paying their way. It is in Western Europe where our power to assist really lies. We need to focus a sharp light on those companies who choose to show one face on the London Stock Exchange and quite another far from home. Christian Aid and other organizations have got hold of this thesis and it is one that works. It was in London that the battle to prevent the exploitation of the holy bauxite mountain in Orissa, revered by the Dongria people, was won and then prevented by an act of the Indian Parliament. So much fuss was made that Vedanta could not hide what it intended to do.

Dambisa Moyo is right – more than aid, Africa needs a stronger tax regime and local institutions that will spend those taxes on infrastructure for the common good. With commodities prices as high as they are today the scales have tipped in favour of Africa for a change. If Africa is not receiving fair dealing today because of previous weakness,the gun is now pointing the other way and foreign miners would do well to initiate fairer deals before they are thrust upon them – that really would be medicine good for the patient not just the doctor.

Anthony Lipmann

7th July 2011