Zippa Journal Oct - Dec 2009

ZIPPA

ZAMBIA INSTITUTE FOR PUBLIC POLICY ANALYSIS

Journal

Features

October - December 2009

Theme: PROPERTY RIGHTS

Freeway – Property Rights in Zambia

The Importance of Intellectual Property Rights

Customary Land Tenure - an Obstacle to

Misconceptions regarding capitalism

The Tragedy of the Commons

Quotation of the month

Agricultural Progress

Correspondence - The Exchange Rate

Security of Mining Developments - the Key

Report on Charter workshop

To Future Investment

ZIPPA Board: Muyunda Mwanalushi (Chair), Jonathan Chileshe (V/Chair), Murray Sanderson (Exec. Sec.), Wilphred Katoto (Hon. Treas.), Ernest Beele, Mary Kakumbi, Charles Lungu, Chearyp Mkandawire-Sokoni, Sara Ngulube

Freeway

ownership in rural areas, and concludes that it is holding back development.

Property Rights in Zambia

The writer's emphasis on the need for title deeds applies also to urban areas. The Peruvian economist, Hernando de Soto, has drawn attention to the huge amounts of physical wealth in the hands of poor people, who, for want of title, lack the incentive to improve their properties and the ability to pledge them as security for loans.

Property rights sound dry and theoretical. But they are vital for economic development. And if official regulations can hold back development, as we saw in the July journal, absent or insecure property rights are even more damaging.

Contractual entitlements are another kind of property right. Such rights should present few problems. In countries where the courts are efficient and completely independent, and where the role of confidence and trust in business dealings is well understood and respected, legal contracts are fully dependable. But this does not yet apply in Zambia, as is clear from an article in this issue on the unhappy situation in the mining industry.

Property rights can be placed in five categories personal, geographical, contractual, intellectual and monetary. 'Personal' stands for security of body and of personal possessions. This is fundamental, but it need not concern us much in Zambia. Suffice it to note that lack of such security in countries to our north precludes economic development in vast areas.

Intellectual property rights are important for artists and musicians, as well as for manufacturers with patents and trade marks. But they are difficult to protect, especially in Africa. This makes it hard for even brilliant persons to benefit from their talents.

Geographical rights are property in the physical sense of land and buildings. Until colonial times all land in Zambia was communally owned, and in rural areas much of this continues. Land for all sounds fine, and cultural loyalty is attractive, so communal ownership still has much public support. But it has serious drawbacks. These are explained in general terms in a famous article, 'The tragedy of the commons' by Garrett Hardin, from which some passages are quoted here. The next article, by John Hudson, former chief executive of the Zambia National Farmers Union, examines communal

Sound money is also a property right, though it is much ignored. Monetary savings can be a major source of investment. But they soon lose value when governments print money as a means of unofficial taxation. Zambia's persistent double digit inflation may seem low in comparison with rates recently experienced in Zimbabwe. But inflation which averages even ten per cent quickly destroys 1

the value of pensions and cash deposits.

society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.

Clearly, property rights in Zambia are still far from secure. How do we compare with other countries? The 2009 International Property Rights Index ranks Zambia 106 out of 115 countries, just nine places from the bottom. This is in sad contrast to Zambia’s top ranking among African countries in the Economic Freedom of the World 2009 Annual Report. Property rights, no less than economic freedom, are essential for economic development.

The National Parks present another instance of the working out of the tragedy of the commons. At present, they are open to all, without limit. The parks themselves are limited in extent -- there is only one Yosemite Valley -- whereas population seems to grow without limit. The values that visitors seek in the parks are steadily eroded. Plainly, we must soon cease to treat the parks as commons or they will be of no value to anyone.

The Tragedy of the Commons

In a reverse way, the tragedy of the commons reappears in problems of pollution. Here it is not a question of taking something out of the commons, but of putting something in -- sewage, or chemical, radioactive, and heat wastes into water; noxious and dangerous fumes into the air; and distracting and unpleasant advertising signs into the line of sight. The calculations of utility are much the same as before. The rational man finds that his share of the cost of the wastes he discharges into the commons is less than the cost of purifying his wastes before releasing them. Since this is true for everyone, we are locked into a system of "fouling our own nest," so long as we behave only as independent, rational, free enterprisers.

Garrett Hardin (1968)

The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy.

Customary Land Tenure: an Obstacle to Agricultural Progress

As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, "What is the utility to me of adding one more animal to my herd?" This utility has one negative and one positive component. 1.

The positive component is a function of the increment of one animal. Since the herdsman receives all the proceeds from the sale of the additional animal, the positive utility is nearly + 1.

2.

The negative component is a function of the additional overgrazing created by one more animal. Since, however, the effects of overgrazing are shared by all the herdsmen, the negative utility for any particular decision making herdsman is only a fraction of - 1.

Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another.... But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit -- in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a

John Hudson OBE Except on State land and around urban areas, mostly along the line of rail, customary tenure exists on 95% of land in Zambia. The population to land ratio (an average of 15 people per square kilometer) is low, but the area includes uncultivable land such as swamps, hills, forest reserves and national parks. There are local areas of population congestion. It is however estimated that over 85% of arable land remains uncultivated. One of the main reasons for this underutilization of a basic natural resource is the system of customary land tenure. Its main features are as follows. All land is nominally vested in the chief of the area, who is responsible for its allocation to his or her people, and for settling land disputes. There is no documentation, mapping, or rent. The occupier of the land is normally entitled to retain it for as long as it is actively cultivated. If cultivation ceases, the chief may reallocate it to someone else. This system of tenure has the advantages of 2

perhaps be lessened by use of satellite methods, without on site survey. Meanwhile, over a vast area of Zambia, would-be commercial farmers remain frustrated, with the result that they eventually give up and join the migration to towns.

informality and absence of bureaucratic procedures, and it works well in a situation of subsistence agriculture with ample unused land. But it also has the following serious drawbacks: 1.

2.

3.

The area allocated does not include grazing. Anyone is free to graze livestock on any land that is not actually under cultivation. Fencing is regarded as anti-social. Thus there is no incentive to limit numbers of livestock to the carrying capacity of the land. This can cause overstocking, grazing deterioration, uncontrolled bush fires and erosion. In effect, everyone is free to use uncultivated land for grazing, but nobody is responsible for its proper use.

Since independence, there has been a series of land tenure reviews by the Ministry of Lands, but although the facts are well known, none has led to any serious action to improve matters. This may have been due to ministerial reluctance to interfere with chiefs' traditional land functions. Some chiefs are suspicious of state title as they think that it could lessen their control over the holders, and are therefore reluctant to approve applications. A possible solution to these problems might be an approach to the House of Chiefs. If the chiefs could be persuaded that state title would benefit their areas as a whole, as well as individual families, they would start to make it more readily available. The outcome could be the removal of a major impediment to agricultural progress in the rural areas. Employment opportunities would increase, as well as farm output. Long term investment such as fencing to enable viable stocking rates, construction of dams for livestock watering and irrigation, crop rotation, and control of bush fires would all become possible, to the great benefit of the national economy.

As land under customary tenure is not bought or sold and has no documentation, it is not acceptable to financial institutions as collateral for farming credit.

The system does not guarantee the long term security of tenure essential for investment in capital improvements. Chiefs can dispossess farmers, and can reallocate land not actually under cultivations.

These are serious obstacles to agricultural development. However, there is a reasonable procedure for obtaining secure title in areas under the customary system. An applicant, whether locally resident or not, can seek the chief's permission to convert an area of unused land, or of land which the applicant is cultivating, into a titled holding. If the chief is persuaded that this would be in the general interest of his people, he may approve the application. He then confirms this in writing to the district council, which will consider and approve or reject it. If approved, the application is forwarded to the Ministry of Lands. The ministry should then arrange for survey of the land to support issue of a written 99 year lease. A lease enables the tenant to fence the land, to improve the grazing, to apply for an investment loan, to sell his rights to the land, and to pass the land on to his heirs on his death.

Author: John Hudson is a former Chief

Executive of the Zambia National Farmers' Union

Security of Mining Developments - the Key to Future Investment By Grant Gatchell

What is special about 1st of April 2008? People who are concerned about Zambia's mining industry regard this day as of crucial importance, but for completely different reasons. This date marked the enactment of the Mines and Minerals Development Act, 2008. The Act repealed its predecessor of 1995, scrapped the Development Agreements made under it, introduced a new mining tax regime and included provisions which aimed to promote the involvement of Zambians in the industry. The country as a whole congratulated itself on the withdrawal of what were seen as overgenerous benefits, which had been conceded too easily to foreign investors, and on the projected revenues to follow. But most foreign investors in the industry responded by cancelling or deferring capital expenditure and by slashing exploration programmes. Why did they respond in this way?

This procedure is workable. It ensures that all concerned are fully consulted, and that the applicant gets the long term and legally enforceable tenure essential for commercial farming or other enterprises.

But in practice the backlog of applications is so great that many applicants feel completely frustrated, and progress in a vital occupation is retarded. In many cases, the delays are due to shortage of surveyors. However, the survey bottleneck could 3

It was not due to spite or resentment, nor even to reduced profitability, but because this unnegotiated, unilateral cancellation of their contractual rights shattered their confidence in the dependability of the Zambian Government. When assessing a country's attractiveness for investment, the key ingredients of a mining policy fall into three main categories: 1.

2.

3.

even though the legislation was passed in 2008. Administrative opacity is a problem worthy of a paper on its own: it is one of the greatest threats to security and to building trust.

The 2008 Act removed the entitlement of the holder of a prospecting licence to the grant of a mining licence following successful exploration. This entitlement is an important internationally recognized pre-requisite for exploration. Indeed, why would one risk millions of dollars in an already high-risk business if one is not entitled to a licence to mine what one finds?

Stability of legislation.

Security of tenure of mining rights.

Incentives and guarantees for investment.

Let's look at the status of these three ingredients.

The requirement for the holder of a mining licence to possess an annual operating permit may seem innocuous. However, the potential for separating ownership of a resource from permission to exploit it is very worrying. In practice, it would be (and actually has been) a small legal step to nationalize the resources of an established mining operation while relegating the current owner to contract mining and mineral processing.

Stability of legislation

The Mines and Minerals Development Act of 1995 was amended by subsequent Acts no fewer than eight times, and finally replaced by the 2008 Act. This new Act has already been amended twice. By these frequent changes Zambia has shown the international business community that it cannot safely rely on stable legislation.

The requirement to obtain written access agreements from traditional rulers and legal occupiers of land is also disquieting, as the relationship between surface and mineral rights can be difficult to determine. No access agreement means no right of entry to your mining right and, once again, there is only limited recourse to appeal. This has led to situations where explorers have been held hostage by individuals looking for a large financial return before the first borehole is even drilled. Even worse, access agreements have been arbitrarily cancelled after millions of dollars have been invested.

Security of tenure of mining rights

Security of tenure lies at the core of any assessment of a country's attractiveness to investment within a competitive environment. This is particularly true for exploration, which is the future of Zambian mining. Create uncertainty here, and serious investors already in the country will cancel or curtail their exploration programmes. Many potential investors will go ahead only if they are confident that licences obtained will remain in their possession as reliable concessions to explore for the commodities stated. The 2008 Act has a number of problems.

Incentives and guarantees for investments

At the time of privatization of the copper mines, the Government and its advisors considered it essential to provide binding Development Agreements in order to instill sufficient confidence for the large investments required to revitalize the sector.

Probably the most contentious provision allows for applications for mining rights within an existing right, subject to consent from the holder of the right. Furthermore, consent cannot be unreasonably withheld and, in the event of denial of consent, the applicant has the right of appeal, but there is no provision for appeal by the holder of the mining right. Imagine the situation where a portion of your mining licence where you have invested, say, USD500 million has been awarded to another company resulting in compromised security and integrity of your operation. Having suffered this, would you expand existing operations or develop a new mine elsewhere in the country?

The 2008 Mines and Minerals Development Act cancelled the agreements and removed the Minister's power to enter into any agreement for the grant of a mineral right. From the industry's perspective, by unilaterally canceling the Development Agreements, Zambia has shown the international business community that it may not be able to rely upon legally binding agreements. Sadly for Zambia the current Mines Act contains no provisions governing incentives and guarantees for investment. In a highly competitive world where it is essential to actively attract investment, this is a glaring omission.

In exploration the situation is even worse, as many mining rights have actually been granted within prospecting licence areas without consent from the holders. This has been going on since around 2004,

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reduce its availability to others.

Conclusion Current mining legislation contains many provisions which entail uncertainty. The greatest offenders concern security of tenure, while the greatest omission relates to investment guarantees. Both are features essential for the development of a vibrant mining industry, and they require urgent review, benchmarking against international best practice. Without such a review trust will not be rebuilt. Until this is done, do not expect responsible large-scale, high-cost, high-risk exploration, which is desperately needed in order to find deposits that can replace the aging, high-cost mines of the Copperbelt. Author: Grant Gatchell, Ndola

Given the intangible nature of IP, innovators face a challenge to appropriate the economic benefits of their ideas. In order to overcome this problem, governments grant intellectual property rights (IPR) to assist innovators and provide incentives for innovation and IP dissemination. Recently an Intellectual Property Rights Indaba was co-hosted by the Free Market Foundation (FMF) and International Policy Network (IPN). The indaba covered fundamental aspects of intellectual property rights and focused on three major fields: software, health care and music. The keynote address was delivered by Douglas Lippoldt, Senior Economist & Policy Analyst at the Organisation for Economic Co-operation and Development. According to Lippoldt, “Technological development is the tool to accomplish greater economic development”. In order to develop technologies and increase the capacity of technologies within the economy, it is essential that technology is well protected so that there is an economic incentive to develop and/or 'import' new technologies.

The Importance of Intellectual Property Rights

By Jasson Urbach

Most rational people know the importance of defending their property. If you acquired property in a legal manner you would expect there to be some type of recourse if someone disposed of it illegally. In a world with no property rights or loosely enforced property rights there is no economic incentive to protect, improve or even acquire property.

Lippoldt also stated, “A significant number of countries, both developing and developed, have substantially strengthened their IPR's environment”. Lippoldt demonstrated that there is a statistically significant positive relationship between IPRs, foreign direct investment, trade, research and development and patent applications. In other words, by strengthening IPR one can reasonably expect FDI, trade, R&D and patent applications to increase.

With increased investment in an economy, income per capita increases. Higher per capita incomes lead to greater levels of saving. This in turn leads to greater levels of investment, thus completing the virtuous cycle. Therefore, it is imperative to protect property rights so that this investment in the economy can occur and grow.

Lippoldt cautioned, “IPRs are just one factor, amongst others, that influence innovation”. IPRs are not a silver bullet policy solution - they account for just a portion of the variation in the economic indicators. Successful implementation of IPR regimes depends on complementary factors such as the quality of legal institutions, markets and infrastructure. Simply put, the efficacy of intellectual property reform is ultimately subject to the environment in which IPRs operate.

Similarly, intellectual property rights (IPR) play a key role in the ability of rights holders to capitalise on their innovations. But what exactly is intellectual property (IP)? The World Intellectual Property Organisation refers to IP as creations of the mind, for example, inventions, literary and artistic work, and symbols, names, images and designs used in commerce. IP is omnipresent and surrounds us in nearly everything we do during the course of our everyday lives.

According to the 2009 International Property Rights Index (IPRI), which covers 115 countries around the globe and represents 96 per cent of world's GDP, South Africa ranks 24th. The index shows that the countries ranked in the top 20 per cent are 9 times wealthier than countries ranked in the bottom 20 per cent. More importantly, the index demonstrates the positive and statistically significant relationship between property rights and gross domestic product (GDP) per capita. More specifically, a one

The intangible nature of IP should not detract from its importance to society. One of the major benefits of this intangible nature is that IP has a tremendous ability to reach a vast number of people at one time. More specifically, IP does not have the same characteristics as tangible property. For example, the shirt that I am wearing precludes anyone else from wearing it. However, the use of IP, such as a software programme, by one person does not 5

chosen the correct path, and he did not query the desire to be rich. His concern was whether market fundamentalism has an adverse influence on the values of rich people.

point increase in the IPRI score predicts a USD7,616 increase in GDP per capita. The Index also shows that low-rated countries with improving IPRs prosper, whereas high-rated countries with declining IPRs stagnate. For SA this means that the hard work we have done to achieve our position is not over. We need to constantly improve, or else we risk slipping down the ranks. For if property rights are not strongly enforced, there is little economic incentive to invest, improve or even to acquire property.

There is nothing wrong with ambitious people who want to be wealthy. Rather than discourage people from having the desire to be wealthy, we should encourage the rich to grow their businesses as long as they comply with the laws of the country. We need more wealthy individuals not less. “Conspicuous expenditure” has also been blamed in a similar vein as a supposed by-product of capitalism, again linking unpopular values with capitalism. However, conspicuous expenditure is not a problem for the rich - they can afford it - but for the middle class and the poor, and, to the extent that it exists, it cannot be blamed on the rich or capitalism. Far from capitalism being an economic system that exploits the poor, it creates the wealth that is the only means of reducing poverty, and thereby serves the poor better than all potential alternatives.

Author: Jasson Urbach is an economist with the Free Market Foundation.

Quotation of the Month

'It is not property rights but their absence which is anti-social.' - Samuel Brittan

The poor understand the value of wealth very well, which is why they risk their lives to migrate from socialist to capitalist countries, particularly countries where there are lots of rich people to offer them employment, goods and services. The only people who are confused about the virtue of wealth are leftists who are increasingly frustrated by the poor who keep voting with their feet for capitalism.

Misconceptions Regarding Capitalism By Ayanda Khumalo

As part of its propaganda war on capitalism, the left expounds the theory that capitalism is inherently evil, encourages poor moral values and equates with and promotes greed. Recently our political leaders have been condemning people who have the urge to become wealthy, blaming this urge on “market fundamentalism”.

Apartheid is often touted as a product of capitalism by those who seek to tarnish the image of capitalism and slow its advance here and around the world, especially since the fall of communism in the USSR.

The real problem is misinformed anti-market fundamentalism, which is fundamentalism in the true sense of the word. It is blind faith that is in conflict with reality. The wealthy and those aspiring to be wealthy have been condemned as greedy and ruthless. However, in a true capitalist environment it is hard work and providing value to consumers that allows people to become wealthy. In such an environment there is proper application of the rule of law, no one is granted special statutory privileges, there are no barriers preventing competitors from entering any market, private property and persons are respected and protected, and there is unlimited opportunity for upward mobility available to the innovators and producers who best serve consumers.

Apartheid was not capitalism but a racist social agenda by those in power at the time. Similarly BEE is blamed on a capitalist agenda, which it is not - it is a political and social agenda that has nothing whatsoever to do with capitalism.

Capitalism does not promote high prices, the exploitation of anyone or corruption. On the contrary, it is capitalism that exposes and eliminates corrupt and inefficient businesses. This is unlike socialism in which malinvestment survives by virtue of the power of governments to perpetuate wealth-consuming follies by transferring taxed wealth from productive citizens to state industries. Note that capitalism does not promote monopolies but rather efficiency and service through competition. The existence of inefficient “parastatals” such as Telkom, that charge high prices, cannot be blamed on capitalism.

Whilst President Mbeki expressed concern in his widely publicised 4th Nelson Mandela Annual Lecture about greed under South Africa's capitalist system, he stressed that his government had

Stalin and Mao each massacred over 30 million of 6

their own citizens in the name of communism - that is evil. Any system that denies its citizens the right to freely undertake economic activity is evil. Capitalism, like money, is neither good nor evil. In this sense capitalism is neutral. It is neutral regarding religion, morals, ethics, good, evil or any other subjective beliefs and values. To equate capitalism with evil is propaganda designed to confuse the majority of our people.

fundamental disincentives to diversification in Zambia has been the chronically over-valued exchange rate. Over the years Zambia's consistently high inflation, by international standards, has pushed up domestic prices. But the decline in kwacha buying power has not been adequately reflected in the exchange rate. During the era of fixed exchange rates this was deliberate. Yet under the subsequent floating exchange rate policy we have also seen a mounting disparity between the nominal exchange rate and the 'real' (or realistic, i.e., inflation and productivity adjusted) exchange rate. The nominal exchange rate has for long remained largely static, despite some ups and downs. Indeed today's nominal rate of approx. $1 = K4,800 is the same as in October 2004. Such stability is artificial. It has resulted from enormous inflows of aid, and recently of foreign investment, and by loan forgiveness. This has created the 'strong' kwacha, when a realistic exchange rate which reflected domestic inflation might have been $1 = K7,500 (or higher). Just imagine what a boost such a rate would have given to all kinds of exports, while enabling local produce and manufactured products to replace imports.

It is a capitalist economic environment, conducive to maximising the economic freedom and prosperity of its citizens, that will best serve SA. It creates wealth while socialism destroys it. Interventions in the market mechanism distort or subvert the proven benefits of capitalism and are usually negative for citizens. Capitalism gets incorrectly blamed for the consequences. Questioning the 'morality' of capitalism is a favourite strawman of its opponents. It is people who are good or evil, moral or immoral, not economic systems. However, it is true that capitalism, or economic freedom, rewards peaceful voluntary exchange, while socialist systems reward their leaders and impoverish their followers. However, it is not the responsibility of the economic system but of religious, political and other leaders and institutions of civil society, especially the family, to create a climate of virtue.

Few Zambians have ever taken much notice of the persistent damage the chronically over-valued exchange rate has done to their economy, and its lack of capacity to generate income, wealth, food security, employment and welfare. By contrast, the Chinese understand the growth-and wealthinducing effects of a strategically under-valued exchange rate.

Author: Ayanda Khumalo is the Deputy Chairman of the Free Market Foundation

Correspondence - The Exchange Rate

Moving the real exchange rate to a level where Zambia can compete internationally will not resolve all of Zambia's growth related problems. There are issues of human capital, the lack of integrity in public systems, weak infrastructure, and the sense of entitlement among organized labor that all need to be addressed. But, not moving the real exchange rate in the appropriate direction will ensure that Zambia's future repeats the pattern of recent decades - persistent poverty, “hungry farmers on fertile land”, low average rates of economic growth, distorted development, and minimal diversification.

Strong kwacha frustrates diversification Sir,

Concern about diversifying the economy is not new in Zambia. Way back in 1949 the colonial government commissioned a report on broadening the economy's industrial base. The First National Development Plan (1966-1970) highlighted the need to diversify the economy away from copper. A 1984 study repeated that message. Indeed, Zambian governments have regularly emphasized the need for diversification.

Malcolm F McPherson, Harvard University

30 August 2009

Report on Charter Workshop

Desire is one thing, practical effect is another. Your recent journal on 'Enabling diversification' identified several obstacles. Curiously, there is no mention of the exchange rate. Yet, while other obstacles and distortions are important, one of the most 7

The July issue of the journal mentioned plans for a workshop on customer service charters. This was duly held in Lusaka on 24th September. It was

arranged in liaison with Cabinet Office, and attended by the first three charter institutions, as well as by the Public Service Management Division and the Ministries of Mines and Tourism, which are soon to launch their own charters. The general public was strongly represented, and we also had representatives from the Triangle of Hope Initiative. The star of the show was Mrs. Joyce Amoah-Ntim,

Assistant Commissioner of Ghana's Internal Revenue Service, which has operated a taxpayer charter since 1994. The participants displayed an impressive determination to make the charter concept work in Zambia. Among the concluding resolutions was a recommendation to hold a follow-up workshop in 6 months time to review progress.

Disclaimer

The views expressed in this journal are those of the authors. They are not necessarily shared by members or by ZIPPA, which has no official view.

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