These are slides from a revision presentation covering aspects of Extract 3 for the OCR F585 June 2016 Global economy paper. The presentation focuses on progress in human development in Zambia, volatile copper prices and the terms and trade and the issue of whether Zambia is experiencing a natural resource curse.

1. Primary commodity dependence and the terms of trade
Primary Product Dependency & the Terms of Trade
Extract 3

2. Extract 3: Text and Commentary
• “A number of developing
countries are heavily
dependent on exports of
commodities for foreign
exchange earnings.”
• “For example, approximately
three quarters of Zambia’s
export revenue comes from
copper.”
• “Rises in commodity prices
can bring significant benefits
to economies such as that of
Zambia, including increases in
tax revenue which can be
used to improve
development.”
• Extract 3 focuses on primary
commodity dependence and
considers whether a rich
endowment of natural
resources can be used to
finance and promote
economic growth and human
development.
• According to the World Bank,
during the past four years,
copper has accounted for an
average of 66% of total
Zambian exports (X)
• Mining companies have paid
16% of the taxes and other
revenue that the Zambian
government has collected

3. Paul Collier’s 4 “Development Traps”
• Professor Paul
Collier has
identified four
“development
traps” - they are
1. Conflict
2. Reliance on
natural
resources
3. Being
landlocked
with bad
neighbours
4. Bad
governance

4. Zambian Pattern of Exports of Goods in 2013
The extent of primary export dependence is shown in this graphic from the
Observatory of Economic Complexity (MIT).
Click here for the latest data on Zambian exports:
http://atlas.media.mit.edu/en/profile/country/zmb/
Zambia is the 86th largest export
economy in the world and the 66th most
complex economy according to the
Economic Complexity Index (ECI).

5. Zambian Pattern of Imports of Goods in 2013
Text goes here
Zambia is an importer of fertilizers, oil, medications & electrical items

6. Fig 3.1: Evidence of Development Progress in Zambia
• Figure 3.1 provides a snapshot of progress achieved by the developing economy
Zambia in some of the components of the Human Development Index (HDI)
• Note: Primary school enrolment includes adults returning to education – though
we are not told what the mix is of adults and school-age children
• Three years are chosen over a 13 year period but the data excludes a number of
key aspects of development such as income inequality and poverty

7. Development Progress in Zambia (Long Run Data)
• This table looks at the long term development picture for Zambia.
• Since 2000, life expectancy at birth has risen by over 16 years which is a
remarkable achievement given the HIV-aids related decline in life expectancy
between 1980 and 2000.
• Between 2005 and 2013, real GNI per capita in Zambia (at constant 2011 prices
and adjusted for purchasing power parity) has risen by 34% and Zambia’s HDI
value has grown from 0.471 to 0.561.
• Zambia has risen 7 places in global HDI rankings over recent years

8. Africa and Changes in HDI Measures 2005-12
Source: African Development Report, 2014
Zambia has
outperformed the
average improvement in
GNI per capita and
health and education
outcomes over the
years 2005-2012.
But other African
countries have done
even better such as
Rwanda, Angola and
Ethiopia

9. Limitations of the Human Development Index (HDI)
1. The standard HDI measure does not take into account
qualitative factors, such as cultural identity and political
freedoms (human security, gender opportunities and
human rights for example)
2. The GNI per capita figure – and consequently the HDI figure
– takes no account of income distribution.
• If income is unevenly distributed, then GNI per capita will be an
inaccurate measure of the monetary well-being of the people.
• Inequitable development is not human development
3. Purchasing power parity (PPP) values used to adjust GNI
data change quickly and can be inaccurate or misleading
4. 2010 saw launch of a new Inequality-adjusted HDI, a
Gender Inequality Index and a Multidimensional Poverty
Index. The average loss in the HDI due to inequality is
about 23% - for Zambia it is 34%

10. HDI Progress: Education Indicators for Zambia - 2014
• Mean years of schooling 6.5
• Expected years of schooling (note mismatch with mean years) 13.5
• Adult literacy rate (% aged 15 and older) 61.4%
• Population with secondary education (% aged 25 and above) 35%
• Primary enrolment (% of children of primary school age) 114%
• Secondary enrolment (% of children of secondary school age) 101%
• Primary school dropout rates (% of primary school cohort) 47%
• Pupil-teacher ratio 49
• Expenditure on education (measured as a % of GDP) 1.35%
Significant progress has been made in Zambia in raising the expected years of
schooling available to the population. But … in evaluation…
• Only one third of adults have experienced some form of secondary education
• The primary school drop-out rate is nearly 50%
• The pupil teacher ratio remains high and spending on education is less than
1.5% of GDP. Teacher quality is variable and there are hundreds of thousands of
aids orphans in Zambia – a key cause of the 40%+ child labour ratio

11. HDI Progress: Health Indicators – Zambia - 2014
• Life expectancy at birth 58
• Infant mortality rate (per 1000 live births) 56
• Under five mortality rate (per 1000 under five children) 89
• Infants lacking immunization - % of one year olds 14%
• Infants lacking immunization - % of one year olds, Measles 17%
• HIV prevalence (% ages 15-24), female 4.6%
• HIV prevalence (% ages 15-24), male 3.5%
• HIV prevalence (% ages 15-49), total 12.7%
• Adult mortality rate (per 1000), female 377
• Adult mortality rate (per 1000), male 426
• Age standardized obesity rate (% of ages 20 and older) 4.2%
• Health expenditure (% of GDP) 6.12%
Zambia has made big progress in raising life expectancy and cutting child mortality.
Immunization rates have climbed & spending on health as a % of GDP is high
relative to most other sub-Saharan countries and much higher than in education

12. Gender Indicators – Zambia - 2014
• Gender Inequality Index 0.617
• Maternal mortality ratio (deaths per 100,000 live births) 440
• Adolescent birth rate (births per 1,000 women aged 15-19) 125
• Share of seats in parliament (% held by women) 11%
• Population with secondary education, female 25.7%
• Population with secondary education, male 44.2%
• Labour force participation rate, female 73.2%
• Labour force participation rate, male 85.7%
• HDI, female 0.534
• HDI, male 0.585
• Gender inequality became central to the HDI data set from 2010 onwards
when a gender-inequality adjusted HDI figure was first published.
• The female labour force participation rate in Zambia is high due to
dependence on farming. Maternal and infant mortality rates remain very high
and only a quarter of females have an education to secondary level.

13. Income / Command over Resources – Zambia - 2014
• Gross national income (GNI) per capita (2011 PPP$) 2,898
• GDP per capita (2011 PPP$) 2,990
• Gross fixed capital investment (% of GDP) 23%
• Domestic credit provided by the banking system (% of GDP) 18%
• External debt stock (% of GDP) 25%
• Measuring the extent of poverty in Zambia
• Population in multi-dimensional poverty (%) 63%
• Population living below $1.25 a day (extreme poverty) (%) 74%
• Share of working poor, living on below $2 a day (%) 76%
In 2015 the World Bank revised their benchmark for the number of people living in
extreme poverty. New data will count the number of people living on less than
$1.90 per day at PPP.

14. Inequality Measures – Zambia - 2014
• Inequality measures
• Quintile ratio 17.4
• Palma ratio 4.8
• Gini coefficient 0.575
Quintile ratio
This is the ratio of the average income of the richest 20% of the population to the
average income of the poorest 20% of the population
Palma ratio
This is the ratio of the richest 10% of the population's share of gross national
income divided by the poorest 40%'s share
Gini coefficient
A Gini index of 0 represents perfect equality, while an index of 1 implies perfect
inequality. Zambia has a very high level of income inequality measured this way
Source: UN HDI report 2014

15. Summary of Financial Flows for Zambia in 2014
• International Trade (% of GDP) 83%
• Foreign direct investment, net inflows (% of GDP) 10%
• Private capital flows (% of GDP) -8.23%
• Net official development assistance received (% of GNI) 6.1%
• Remittances, inflows (% of GDP) 0.24%
• Total foreign currency reserves minus gold (% of GDP) 2.51%
• Zambia is a relatively open economy with a trade-to-GDP ratio exceeding 80%.
• As we have seen, the country scores lowly on economic complexity with the
bulk of their exports coming from primary commodities such as copper
• FDI inflows have been a significant percentage of annual GDP but Zambia has
also seen a strong net outflow of private capital – in part because of changing
tax regimes for foreign investors and also a weak and volatile exchange rate
which has led to some capital flight.
• Remittance inflows for Zambia are low compared to many other lower-middle
income countries. Zambia’s overseas aid dependency is also low as a % of GDP.

16. Defining and Interpreting the Terms of Trade
• Definition: A country’s terms of trade is calculated as the ratio of the price
index for exports of goods and services to the price index for imports
• Terms of Trade (ToT) index = (price index for exports of goods and services)
/ (price index for imports of goods and services)
• ToT can be interpreted in words as the amount of imported goods and
services an economy can purchase per unit of exported goods and services.
• A rise of the price index for exports of goods and services improves the
terms of trade and means that a country can buy more imports for any
given level of exports.
• This has been the case for Zambia until 2011 but this is now changing as
copper prices fall because of the Chinese economic slowdown and because
their exchange rate is depreciating leading to higher prices for imports
• The terms of trade can be used as one measure of a country's trade
competitiveness – for example, a rise in the index might lead to a worsening
of relative price competitiveness for Zambian products

17. Fig 3:1 Changing Zambian Terms of Trade
Extract 3: “Fluctuations in commodity prices can also have a significant
impact on the terms of trade of a developing country such as Zambia”
Base Year = 2000
Zambia’s terms
of trade index
more than
doubled
between 2002
and 2006
Falling commodity
prices caused by
the global financial
crisis then caused
the Zambian terms
of trade to decline
A sharp rebound in
copper prices
causes further
improvement in
terms of trade in
2009-2011

18. Awareness: Volatility in the Global Price of Copper
0
2000
4000
6000
8000
10000
12000
Jan-80
Jun-81
Nov-82
Apr-84
Sep-85
Feb-87
Jul-88
Dec-89
May-91
Oct-92
Mar-94
Aug-95
Jan-97
Jun-98
Nov-99
Apr-01
Sep-02
Feb-04
Jul-05
Dec-06
May-08
Oct-09
Mar-11
Aug-12
Jan-14
Jun-15
Copper benchmark price, US dollars per tonne
Zambia is not the biggest copper producer in the world
economy. In most cases Zambian copper mines are
“price-takers” which means that they sell as much as
they can at the prevailing world price. The changes in the
terms of trade shown in F585 Extract 3:1 mirror closely
the volatility of global copper prices shown here
especially over the last 12-14 years.

19. Consequences for Zambia of a Collapsing Copper Price
0
2000
4000
6000
8000
10000
12000
Jan-80
Sep-83
May-87
Jan-91
Sep-94
May-98
Jan-02
Sep-05
May-09
Jan-13
Copper benchmark price, US dollars
per tonne
Fall in export revenues – leading to a fall in AD – causing a
drop in Zambian GDP growth
Zambia now running a large current account deficit –
draining FX reserves
Depreciation of currency – leading to accelerating
inflation of more than 10%
Job losses in mining – rising cyclical & structural
unemployment
Negative multiplier effects for supply-chain
businesses, housing, retailing
Fall in tax revenues - rising budget deficit / rising debt
– may need IMF support
Social consequences – mining companies have subsidised
HIV medicines, inequality worsening

20. Update: Sharply Falling Terms of Trade for Zambia
226
206
170
231
245
210
198
192
183
170
150
160
170
180
190
200
210
220
230
240
250
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Zambia - Terms of Trade, 2000=100 The data in Figure 3.1 finishes in
2012 and showed a small fall in
the terms of trade. Since then
Zambia has seen a substantial
fall (deterioration in her terms
of trade) caused by a sharp fall
in global copper prices and also
a depreciation of the Zambian
exchange rate.
Source: International Monetary Fund, Terms of Trade for Goods for Zambia
Since 2011, the terms of trade
for Zambia have deteriorated
by 31 per cent

21. Zambian Trade and Current Account Balance
6.7
2.6
6.3
13.7
9.7
6.4 6.1 6.1
4.9
3.8
-1.2
-3.3
6.0
7.5
4.6
5.5
-0.6
-1.4 -1.4
-2.6
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Annual trade balance in goods and services and the current account
balance for Zambia, measured as a percentage of GDP (Source: IMF)
Trade Balance in Goods and Services Current Account Balance
Forecast
Can you explain why the Zambian
current account balance is nearly always
lower than the trade balance?

22. Extract 3: Tax Evasion in Zambian Mining
• “Despite the fact that
copper accounts for over
75% of Zambia’s export
revenue, it still only
contributes 10% to
government tax revenue.”
• “The Zambian government
has expressed concerns
that multinational
companies engaged in the
extraction of copper, and
international commodity
traders, have been evading
paying tax.”
• Tax evasion is illegal
whereas tax avoidance
happens when individuals
and businesses find tax
loopholes that reduce the
amount of tax they pay
• According to the Financial
Times in 2013 “Much of the
developing world is
struggling to tax globally
mobile profits and capital.
African countries are
hemorrhaging tens of
billions of dollars in
potential revenues each
year.”

23. Tax Avoidance and Low Revenues from MNCs
• “Barrick Gold Corp., Vedanta
Resources Plc and Glencore
International Plc operate mines
in Zambia”
• “Zambia’s government
estimates that it is losing $2bn
annually as a result of tax
avoidance and transfer pricing
by foreign companies on its turf
– equivalent to 10 per cent of
their gross domestic product.”
• Transfer pricing is the price
at which divisions of a
company transact with each
other.
• A MNC mining company
operating in Zambia might
invoice their parent company
for the costs of consultancy /
engineering services or for
loans.
• This reduces their profits and
thus lowers their liability to
pay corporation tax
• Tax avoidance i.e. through
over-reporting of costs and
under-reporting of copper
production and revenues
Many copper mines in Zambia are
operated by Chinese companies
who bring in their own labour and
don’t necessarily pay the full
amount of tax.

24. Extract 3: Text and Commentary
• Mining employs 90,000 people
in Zambia
• Mining contributes about
three-quarters of the
country’s foreign exchange
earnings and up to 30 per cent
of government tax revenue
• 2015 Mining Tax Reforms
• The Zambian government has
twice changed the tax laws on
revenues and profits from
mining in the last two years.
• The export suspension
decision was unsettling for
existing and potential foreign
investors and made no
difference to the world price
• As a result, the Zambian
government temporarily
suspended exports of
copper in 2011 as it
considered rules to improve
revenue collection from the
sector.”
• “This was seen by many as
part of a trend in Africa
towards so-called ‘resource
nationalization’ as African
governments sought a larger
share of the profits from
mines, as well as expanding
state control.”

25. Extract 3: Text and Commentary
• “Some economists are worried
that greater state involvement
and higher taxes might
discourage investment in mining
and in other sectors of the
economy, resulting in a reduction
in the growth of output.”
• “The Zambian government has
been in talks with multinational
companies to acquire a 51%
stake in mining operations to
ensure that the benefits of
resource extraction are more
widely distributed among the
population of Zambia.”
• If higher taxes and/or state
ownership of mines and associated
businesses leads to shrinking
investment in mining and other
sectors, this would be called
crowding-out.
• A 51% stake in mining operations
would be effective nationalization
of the assets of transnational mining
corporations in Zambia.
• This raises a debate over the merits
and de-merits of state versus
private ownership.
• Why would the Zambian
government want to re-nationalize?
Remember, corruption in Zambia is
high, is there political self-interest?

26. Evaluation: Investment in Mining in Zambia
• Mine development takes years to achieve; usually 7-10 years
from exploration to the start of copper extraction
• Requires large upfront capital investment – therefore the tax
regime in Zambia needs to be predictable for foreign investors
to be willing to take the high risks
• Zambia’s copper mining industry is not homogeneous
• Copper-belt mines – older mines with a higher marginal and average
cost of extraction, very labour intensive, they turn easily to losses
when the global copper price falls e.g. since 2013
• New mines – in Zambia’s Northwestern Province – these are mainly
open-mine pits best mined using capital technology, they are more
profitable but create less extra employment
• Main sources of government revenue are from
• Royalties on the value of copper production/output
• Corporation tax on mining profits
• Income tax from people employed in the mines

27. Copper Mining in Zambia – An Overview
0%
2%
4%
6%
8%
10%
12%
14%
16%
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Private ownership National ownership Private ownership
Zambian share of global production (Percentage)Zambia copper production (Tonnes)
Source: International Council on Mining & Metals, 2015

28. Evaluation: Does Zambia Benefit from FDI into Mining?
Employment, Wages and Incomes
• Higher wages – lifting per capita incomes and encouraging saving
• But “profits may be put before people” – many miners and their
families remain in extreme poverty, only 10% of jobs go to women
• Generates rising tax revenues for the government – but not enough?
Exports and foreign currency to pay for imports
• Extracted commodities are a source of export revenues – helping to
improve the Zambian current account and generate foreign currency
• But copper prices are volatile and the recent drop in global prices and
profits has led to a decline in capital investment and many job losses
Environmental aspects
• Mining employs only a small minority of people in Zambia
• Mining is a high risk industry with notoriously poor labour standards
• Copper mines take a high percentage of the available energy leading to
intermittent and expensive energy for other industries

29. 2015 War on Want Report on Tax Avoidance in Zambia
• In October 2015 – War on Want
published a report on tax
avoidance from transnational
companies operating in Zambia.
• According to the report, Zambia
is losing $3 billion a year from
corporate tax dodging.
• The sum is equivalent to nearly
twice Zambia’s spending on
health and education
• Read the report
here:www.waronwant.org/Zambi
aReport

30. Is Zambia Suffering a Natural Resource Curse?
“Although large deposits of
key resources such as oil
would usually be considered
a blessing for the
development prospects of a
country, it often turns out to
be a ‘resource curse’”
Professor Paul Collier
“Close to one third of the
wealth of low-income
countries comes from their
“natural capital” which
includes forests, protected
areas, agricultural lands,
energy and minerals”
World Bank

31. Possible Causes of a Natural Resource Trap
1: Risk of political conflict and
corruption / conflict / land grabs
2: Vulnerability to changes in
world prices which causes high
levels of macro volatility
3: Danger of over-rapid
extraction of finite and
renewable resources
4: Rising prices can lead to a
currency appreciation –
damaging domestic industries
Extraction tends to be
capital intensive and
increases the power of
politicians
Risk of higher
unemployment with
limited welfare safety
nets available
Rapid extraction makes
economic growth
unsustainable
Manufacturing industry
may suffer from de-
industrialisation

32. Economists on Natural Resources
“Resource-rich countries often do not
pursue sustainable growth strategies.
They fail to recognise that if they do not
reinvest their resource wealth into
productive investments above ground,
they are becoming poorer. Conflict over
access to resource rents gives rise to
corrupt and undemocratic governments”
Professor Joseph Stiglitz
“Investing resource revenue in capital assets
abroad makes sense for a capital-intensive
economy like Norway, but most African
economies need a lot of capital themselves.
So they need something like sovereign
investment funds, institutions that
contribute to building infrastructure, raising
education levels and so on.”
Professor Sir Paul Collier

33. Strategies to Overcome the Natural Resource Trap
Better government – including more transparency &
accountability to tax payers so that it is clear where
natural resource revenues are going
Stabilisation Fund / Sovereign Wealth Fund – e.g. to
fund human capital and infrastructure or to inject
money into an economy when aggregate demand dips
Higher taxes of natural resource profits (i.e. extracting
resource rents and then reinvesting in the domestic
economy to increase supply-side capacity)
Diversification – including processing, manufacturing
& tourism – giving higher value added and making the
economy less susceptible to external shocks

34. Extract 3
Primary commodity dependence and the terms of trade
tutor2u.net/economics @tutor2ugeoff
Extract 3