ECONOMIC CHANGE, GOVERNANCE, AND NATURAL RESOURCE WEALTH

The political economy of change in southern Africa

By David Reed

EXECUTIVE SUMMARY

Prepared by Pamela Stedman-Edwards

The essays in this publication examine the relationship between macroeconomic change and the natural resource patrimony of three countries, Tanzania, Zambia, and Zimbabwe, in sub-Saharan Africa. The protracted implementation of macroeconomic stabilization and adjustment programs in the region, and their disappointing economic outcomes, have preoccupied African rulers and the international development community for two decades. And with good reason. The region continues to experience economic difficulties unlike any other, despite a continuing commitment to implementation of adjustment programs in pursuit of ever-illusive macroeconomic stability.

The role of the natural resource patrimony in the economies of these countries, however, has seldom been addressed in the design of stabilization and adjustment programs, either by national policy makers or by the Bretton Woods institutions. In contrast to that approach, we believe that natural resources are central to the difficulties encountered in reforming the economies of many African countries. The appropriation of natural resource rents and mismanagement of natural resource wealth have provided the foundation of statist economic regimes and authoritarian political regimes from which countries of the region have yet to thoroughly extract themselves.

These essays analyze many of the challenges encountered as economic reforms were implemented in the 1980s and 1990s and examine the distribution of benefits and losses as societies underwent structural change. We hope this analysis sharpens understanding of the role that systems of governance, notably those marked by authoritarianism, play in determining how natural resources are (mis)used in the development process of resource-based economies.

The essays take a political economy approach to deciphering the complex interactions among the economic, political, and social actors involved in the process of change on national and international levels. This approach requires that we try to understand the actions and impacts not only of individual actors but also of social groups and the state as they compete with one another in pursuit of wealth and power.

I.The Political Economy of Natural Resource Wealth

Economic structures and systems of governance in sub-Saharan Africa are tied directly to the region’s natural resources in a variety of ways. This relationship dates back to the colonial period when, throughout sub-Saharan Africa, the European colonial powers constructed economic relations dependent on, and explicitly limited to, extraction of natural resource wealth.

When the colonies gained independence in the post-World War II period, the resource-based economies of the newly independent nations lent themselves to statist economic regimes and authoritarian political systems that became entrenched in subsequent decades. In all three countries, these statist economies, one-party political regimes, and the reliance on natural resource wealth, shaped the economic reforms that acquired greater momentum in the 1980s, often generating unanticipated results. Rather than promoting economic and political democratization, the ostensibly neoliberal economic reforms have too often created a new basis for collusion between economic and political elites through control of natural resource wealth while diminishing access of the rural poor to environmental assets on which their livelihoods depend.

The Colonial Period

European interest and investment in Africa surged in the second half of the 1800s when African colonies became part of the battle for geopolitical preeminence on the continent. Long-standing commercial ties allowed the French, Portuguese, and British to establish colonial claims that crisscrossed the African continent, although effective control was limited to coastal and riverine areas. The 1884 Conference of Berlin established the terms under which European powers, including newcomers Germany and Belgium, organized their colonial expansion deeper into the continent. For the 30 years preceding World War I, the colonial powers erected economic regimes predicated on extracting ivory, rubber, cocoa, other agricultural products, and seemingly unlimited mineral wealth through a colonial regime reliant on coerced labor and military control. While the colonial powers had hoped that expansion in Africa would pull the stagnant European economies from the depths of the depression of 1873-96, it was not until the beginning of the 20th century that the colonial system experienced a 15-year period of steady economic growth.

The pattern of trade established between Europe and the African colonies was “one of exports of raw materials and imports of a wide range of manufactured goods and fuels. Without any industries of their own, the tropical colonies remained a buoyant market for the industrial exports of …Europe” (Havinden and Meredith 1993). This pattern of trade would persist until independence and beyond. Private and public investment by the European powers in extraction of resources was substantial, but the colonial powers strongly resisted the development of any local industry in Africa. As a result, the fate of the African economies remained closely tied to the terms of trade for natural resources, which were determined largely by events in Europe. The two world wars, for example, increased demand for inputs for war materiel, but terms of trade for foodstuffs declined, as did investment in the colonies. The depression of the 1930s led to falling demand for most commodities and increased the colonies’ debt burden.

Reconstruction of Europe after World War II led to a rise in export values and trade volumes for the colonies. The resulting period of dynamic growth increased competition between the colonies and their European sponsors, as the colonies sought to open opportunities for economic diversification and industrial development. This conflict was an important catalyst in the struggle for independence that marked the next 20 years in Africa. As 17 African countries gained independence in 1960, decolonization altered political dynamics across the continent, including in Tanzania, Zambia and Zimbabwe (Comeliau 1991).

Authoritarianism

African countries shared many characteristics that strongly marked the post-independence period, most notably their economic dependence on natural resource wealth. Because the European powers had limited the African colonies to commodity production and raw material extraction, their economies remained fairly simple structures dependent on export of a handful of commodities to the developed world. A second common feature was the lack of a dynamic entrepreneurial class that could respond quickly to the removal of colonial era political and economic constraints and drive the economic diversification of the new nations. The African economies depended on foreign mining and agricultural companies for export earnings, and on small-scale farmers to satisfy domestic demand. Moreover, the legal and institutional infrastructure inherited from the colonial period created obstacles to market development in most countries.

In this context, four principal forms of wealth accumulation predominated:

  • Rent-seeking state capitalism: By expanding state control into natural resource sectors, governments ensured a steady flow of revenues to finance development priorities.
  • Monopoly production: Along with pervasive rent seeking, monopoly production involving both parastatals and national and foreign companies dominated other sectors, production lines, and markets.
  • Smallholder commodity production: The state, by setting prices, controlling marketing systems, regulating the flow of information, and organizing credit-making institutions, determined the terms and manner by which small and medium farmers were linked to national and international markets.
  • Large-scale commercial agriculture: The one economic sector that escaped the control of state-driven economies was large-scale or plantation agriculture, which was tied directly to international markets.

Given the lack of entrepreneurial foundations for economic development, the new political elites in these countries assigned responsibility for economic planning and development to the state. The state became the repository for rents from natural resources, which were to be used for development and public welfare. Decision-making processes internal to the government determined how rents and revenues were redistributed. Under these conditions, ruling groups felt little need to create transparent political processes. Without public accountability, graft and corruption became entrenched mechanisms used by rulers who could distribute resource rents for private or public benefit in keeping with personal interest or political need.

Whether the authoritarian regimes that sprang up in sub-Saharan Africa necessarily had to accompany the establishment of statist economic systems in the region is debatable. Clearly, however, the prevailing development strategy wherein the state drove the centralized accumulation process, owned and managed the nations’ enterprises, and had the right to distribute wealth according to its own criteria, lent itself to centralized political control. The ease with which natural resources could be controlled by state corporations strengthened the impetus to place the state in charge of environmental assets of all kinds, ranging from forests, water, minerals, nature reserves and biodiversity, to the land itself (Ghai 1991 and Sandbrook 1985). With most productive assets and economic decision-making under state control, the political elite easily extended its control to social and political life as well. While regimes varied from country to country and in different time periods, some basic features characterized them all, including the regimes in Tanzania, Zimbabwe, and Zambia:

  • domination of political life by a political elite and highly centralized decision-making bodies;
  • suppression of civil society, political parties, and workers’ organizations;
  • marginalization of the peasantry from political processes except for specific political uses;
  • distribution of benefits (economic and other) through a system of patronage and clientelism that required fealty to the political elites; and
  • use of nationalist or socialist ideology to unify the public against external threats and “internal enemies.”

StructuralAdjustment

The World Bank and the International Monetary Fund (IMF) have dealt with the political dimension of economic reforms in Africa and elsewhere in a variety of ways. When structural adjustment programs were first introduced in Africa in the early 1980s, the Bank heralded the reforms as a neutral set of instruments crafted to create more efficient economies, increase productivity, and enhance competitiveness. These programs failed, however, as they collided with the political complexities and frequent social upheavals associated with implementation of reforms in Africa’s statist, resource-based economies.

As these countries took a democratic turn in the early 1990s, the Bank wrestled with the relative merits of working with democratic regimes to implement reforms. For example, the failure of reforms under such autocratic regimes as that of President Kaunda of Zambia, and the rise of public opposition in these countries, suggested that democratic regimes might have a stronger mandate for implementing reform. However, the complexities of working with new democratic regimes often led to equally disappointing economic outcomes. Amidst these vacillations and uncertainties stretching over two decades, the Bank remained unwavering in its exclusion of the growing number of groups from civil society seeking to influence development strategies for their respective countries.

Resistance to the first generation of structural adjustment policies took two basic forms in sub-Saharan Africa, including the three countries in this study. First, elite economic and political groups saw their positions of power and control of resources threatened by reforms that would deny access to resource rents, cut subsidies, disrupt oligopolies, and introduce competitive markets. They often succeeded in slowing or interrupting program implementation through their control of political processes and institutions. Second, poorer social groups opposed the reforms because they suffered falling standards of living as social services were eliminated or fees rose, price supports were removed, and rural services in credit, marketing, and extension were cut. While the urban poor opposed reforms through direct street action, the rural poor were often left without an effective means of protest except when the political elite used them to strengthen their own opposition to reforms.

Implementation of the second generation of structural adjustment programs was more successful in large part because the Bank was able to transfer ownership of the programs to the country governments. Economic technocrats who understood the rationale for the reform programs had slowly but steadily replaced the politicians who had resisted the reforms in the African governments. These new technocrats wrote the economic policies along the lines required by the Bretton Woods institutions from within the national governments and then requested the support of the international lenders.

With this increased support for the reform programs from the technocratic elite, the World Bank and other international development agencies began addressing the political dimensions of economic change through promotion of ‘good governance.’ The principles of good governance promoted by the World Bank and IMF focused on maximizing government financial transparency and impartiality of decision-making on economic efficiency criteria. The World Bank expected to foster good governance by creating market-based economic structures that, in turn, would facilitate the transition to more democratic societies. These objectives included ending monopolistic control of key economic sectors; diminishing public rent-seeking and encouraging market-based wealth accumulation; eliminating the capture of rents by government agencies and individuals by dismantling marketing boards, opening markets to private investors, and other reforms; and altering the internal terms of trade to increase the importance of rural areas relative to the urban sector. These economic changes should have increased competition among many economic agents and groups and required that political leaders create more transparent mechanisms for resolving conflicts among competing groups and interests.

The “good governance” perspective of the Bretton Woods institutions, however, established the state in a subordinate position vis-à-vis markets. That is, in the context of the Bretton Woods institutions’ neoliberal policies, the state’s overriding purpose was to create conditions in which the market could flourish and, thereafter, help adjust society to new market dynamics. Gone from this perspective was the independent functioning of the state that would help establish broader societal goals to which market development would contribute. Gone was the reciprocal complementarity of the state and markets, each contributing to fulfillment of broader, socially agreed-upon goals.

Natural Resource Wealth: Old Challenges in the New Millennium

Several critical issues related to natural resource wealth have remained outside the scope of the reform process although they nonetheless influence the outcomes of the reforms and future prospects for national development. Those issues include the continued dependence on exports of natural resources, the generally declining terms of trade and price fluctuations for these resources, and the close ties between natural resource wealth and rent-seeking.

Despite decades of reforms, the countries of sub-Saharan Africa remain heavily dependent on resource wealth. In Tanzania, agricultural production comprises 47.6 percent of GDP, in Zimbabwe 19.5 percent, and in Zambia 17.3 percent (World Bank 2000). Natural resources remain the primary source of export earnings throughout the region. Zambia relies on copper for 99 percent of its export earnings. Zimbabwe relies on tobacco, nickel, and cotton for the bulk of its export earnings. Tanzania, though equally reliant on commodity exports, has a somewhat broader range of minerals and agricultural commodities from which hard currency earnings are generated.

A more complete picture is provided by adding data on trends in actual revenues generated by commodity exports. Terms of trade, an index used “to measure a commodity-exporting country’s ability to pay for capital goods manufactured in developed countries,” have worked consistently against the countries of sub-Saharan Africa (Akiyama et al. 2001). While export volumes have increased significantly, often doubling relative to 1980 when adjustment programs began, prices have declined steadily. These price declines have caused an annual income loss of approximately 1 percent per year, a 20 percent deterioration over the two-decade period (World Bank 1994).

While disadvantageous terms of trade have been a constant problem, commodity price increases that generate substantial, but short-lived increases in government revenues are also problematic. For example, windfall profits led African countries, including Zambia, to embark on substantial investment programs, which later were abandoned when commodity prices fell. Political and social problems, as well as the insurmountable debt overhang of some African countries, are the result of these boom-and-bust cycles of commodity prices.