Zambia’s failed nationalisation attempt

In 1964, when Zambia gained its independence, it’s newly appointed leaders wanted to create a better life for all of its citizens. Its leaders thought that by controlling the copper companies they would be able to achieve their developmental goals with the revenues derived from mining operations. Zambia’s leaders appeared to see the government’s ownership of the copper companies as being a relatively cost free way to develop the country However, when the world price of copper dropped unexpectedly in the mid-1970s, it put the fiscus under immense pressure and Zambia was plunged into debt as the government attempted to sustain the unprofitable mining operations. The government was forced to make some painful decisions, the cost of which ultimately came at the expense of development in other sectors of the economy.

In the face of the rising costs of production, private companies would have reacted faster and more efficiently. However, the government had made promises to the electorate and had other obligations that did not coincide with good business practices. If it had not assumed majority ownership and imposed restrictions on the mining companies , they would have no doubt responded very differently to the rising costs by, for example, curtailing activities at the marginal mines or even mothballing them until it became profitable to operate them again

If, instead of nationalising the mines, the government had raised the revenue it needed via the tax system, it would have had the finances to invest in other areas of society. By nationalising the mines, it was forced to divert government finances to the mining industry and had no funding for other purposes.

Author: Jasson Urbach is an economist with the Free Market Foundation. The above is based on and contains excerpts from the chapter, Problems with State Ownership of Enterprises, he wrote for the recently published FMF book, Nationalisation.

FMF Policy Bulletin/ 15 February 2011