1. Monetary and Fiscal Policies
39. Although the financial and economic crisis originated in the United States of America, the global attention has been focussed on the policy response of Governments worldwide, and the major actors in the international financial system. This includes developing countries, which now contribute a large share to the global economy and trade flows, and international financial institutions (IFIs), which help oil the system and promote widely shared development (Lin, 2008).
40. The first priority for most SADC Member States should be to prevent the financial contagion from crippling domestic banking and non-banking financial sectors. Given the high level of inter-linkages among the world’s financial firms and sectors, those effects started appearing in most countries, even before the impact was felt by the real economy. The Johannesburg, Lusaka and Botswana stock exchanges tumbled. Some currencies also depreciated substantially, as mentioned earlier, and sovereign interest-rate spreads rose with the “flight to safety” of foreign portfolio investment in world markets. Market capitalization of most stock exchanges fell substantially. At the micro level, some exporters in developing countries are already finding it hard to obtain the trade credits that are their lifeblood, which could cripple export sectors hit by the fall in foreign demand (Lin, 2008).
41. It is therefore important that SADC countries take quick, decisive and systematic measures to ensure that credit crunches and bank collapses are avoided locally. More generally, SADC Member States have two main macroeconomic tools for responding to shocks: monetary and fiscal policy. One great risk is that if the credit crisis is not effectively resolved, the global economy could enter a period of deflation. In such an environment, standard monetary policy will not be effective. However, credit-financed industrial upgrading is a possibility in nearly all SADC Member States, and that would provide more room for monetary policy to work. Not all countries, though, will be able to effectively use expansionary monetary policy. Some may find themselves forced to tighten monetary policy and increase interest rates to prevent excessive currency depreciation or capital outflows. Some Governments may be able to provide some monetary stimulus by lowering interest rates and encouraging investment in sectors where industrial upgrading is most likely to have payoffs (Lin, 2008).
42. On the fiscal policy side, Governments of developing countries have a variety of tools that they could use to cushion the shock. Governments with available fiscal space can respond by injecting well-designed fiscal stimuluses into their economies, so as to generate domestic demand that can offset the expected decline in foreign demand. Developing countries have pressing needs that can be met through public investment, such as the building of infrastructure, especially after a period when private-sector growth has sometimes outstripped the ability of the public sector to provide the infrastructure needed to sustain that growth.
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43. A second area for investment is social protection and human development so as to ensure that a temporary shock is not converted into severe permanent declines in the welfare of poorer households. Many programmes have been evaluated and seem to be worth investing in. Governments should prioritize protection and expansion of programmes that can most effectively buffer the impact of crises on the poorest households (Ravallion, 2008). Types of programmes to consider include conditional cash-transfer programmes to keep disadvantaged children in school, and public-works employment (or workfare) programmes. Such programmes would be appropriate responses for countries with healthy reserves, current-account surpluses or small deficits and solid fiscal policies. In countries with less fiscal room for manoeuvre, programmes like these should be a priority for donor support.
2. Mining-Specific Policies
44. SADC countries need to formulate both short- and long-term policy responses to the global economic downturn. Even though the crisis is not of the sub region’s making, the subregion is part of the world community of States. Indeed, the downturn has affected global economic growth, and the demand for commodities, in general. Since mineral exports effectively link the region to the world economy, the effects of the global recession are being felt through the mining sector first. As stated earlier, the selling price of some minerals is well below the ir production cost. Thus, the first step would be for the mining sector to try to reduce production costs.
45. One way to reduce costs would be to introduce flexible wage structures, whereby mining companies pay lower wages during hard times, and higher wages in boom times. This would help reduce costs until such time as mineral commodity prices pick up. The problem with this proposal is that the mines would have different wage structures, implying that there is no industry standard.
However, this is an issue for unions and mining companies to discuss. It is a controversial proposition, but there should be open dialogue between mine management and labour unions. Mining companies also need to reconsider the salaries and wages of expatriate staff. Currently, the wage differential between expatriate and local staff having the same or similar qualifications is too wide. This leads labour unions to demand higher wages for their members.
46. Governments could also consider modifying the tax regimes applicable to the mining sector to take into account the importance of the sector in terms of its contribution to GDP, export earnings and employment. There should be some flexibility in the way mining companies are taxed. Governments could consider reducing corporation taxes and raising capital allowances during periods of recession, and doing the opposite, raising corporation taxes and reducing capital allowances during boom periods.
47. With regard to windfall taxes, it is important that such taxes be levied even though their administration remains controversial. One advantage of the windfall tax is that it is self- adjusting. One major problem, however, is that the tax is normally levied on revenue. As such, it is argued that it does not take into consideration production costs and the different cost structures of different mines, and some claim that it impacts negatively on the operations of marginal and high-cost mines. Therefore, the level at which this tax is imposed is subject to negotiation. The windfall tax situation differs from country to country, depending on the ownership structures of the mining companies. However, Governments could collect royalt ies, as such tax is applied to the extraction of non-renewable natural
Page 13 resources. In cases where Government is a substantial shareholder in the mining industry or company, this measure may not be necessary.
48. It is important that Governments consider the ownership structures of mining companies and introduce a level of participation for local or indigenous entrepreneurship. Local entrepreneurship must be strengthened if the countries in the subregion wish to retain a substantial share of the benefits from investment in their mining sectors. In instances where local entrepreneurs are not readily available, Governments need to find ways to ensure a more meaningful participation in the mining sector. SADC Member States should draw lessons from global experience: in the United States and the United Kingdom, for example, Government acquired equity in specific companies in order to save jobs. The current state of affairs in the SADC mining sector is a clear indicator of Member States’ vulnerability, since they are heavily dependent on foreign investment with little or no participation by eit her the ir own Government or local communities. It is therefore advisable to encourage local investment in the mining industry. Pension and insurance funds can be used to fulfil this role, while public listings on stock exchanges constitute another avenue.
49. Another cost centre to consider is that of electricity to the mining companies. In some cases, in particular at smelters, electricity can represent as much as 70 per cent of the production cost. Electricity rates are mainly composed of Government dut ies levied at the various stages of generation, transmission, distribution and consumption. Governments could consider reducing electricity rates to the industry, so as to help reduce the production costs for minerals that are of strategic value to the economy.
50. Mining companies could consider ways to reduce supply chain costs. Usually, resource extraction companies practise centralized purchasing, which is costly in the long run. Local companies could supply the same goods for cheaper, and that would also reduce capital outflows. Governments should therefore specify a local content minimum in resource contracts or licences. However, in some cases where local content minimums are specified in the licences and contracts, the SADC country concerned does not have the manufacturing base to exploit the legislative provision. Therefore, local manufacturing bases need to be developed in many SADC countries. South Africa, which has a fairly large manufacturing base, could contribute to developing this capacity in other SADC countries. The companies established must, however, have both local equity and entrepreneurial participation.
3. Economic Diversification
51. Strategies for diversifying the economies of SADC Member States have been in the works since the early days of their independence. Many SADC Member States inherited industrial structures that are highly dependent on the extraction of one or two minerals. National development plans in most SADC Member States acknowledge that they need to diversify in order to effect structural changes in their economies. Botswana, for example, considers economic diversification from diamond mining as an urgent imperative (National Development Plan 9), just as Zambia does with regard to copper mining (First National Development Plan, 1966). The national development plans provide for two main types of diversification: diversification within the mining sector, to include mining of different mineral varieties so as to spread risk; and diversification away from mining into manufacturing and agricultural production for the domestic and export markets. Such diversification would add value to the economies concerned.
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52. Failure to create or induce downstream value addition to crude resources (copper, iron, steel, aluminium) is one reason why many SADC Member States are exposed to the vagaries of economic recessions. Once again it is up to Governments to impose a minimum level of beneficiation on mineral extraction. Failure to establish downstream value-addition industries leads to an indirect export of jobs, since the final processing and manufacturing of finished goods take place elsewhere.
53. Upstream value addition should also be enhanced. In general, there is a lack of local business capacity to take advantage of opportunities created by resource extraction companies, in terms of supply of input goods and services. With the exception of South Africa, many SADC countries have failed to create this capacity among the local business communities. SADC countries should take advantage of South Africa’s capacities in mining and industry to boost their economies. Indeed, this is an attractive regional integration issue that the SADC Secretariat should explore further.
54. Diversified economies are better able to absorb shocks. Diversification is therefore a sound and rational strategy as it enables economic risk to be spread. For many decades, policymakers in the region have called for an export diversification policy towards non-traditional products, albeit with limited success. Export diversification would enlarge the range of products exported and reduce the severity of external shocks. It should be noted, however, that although diversification is necessary, it is not a panacea for resolving economic crises, since in a recession, dema nd for nearly all products falls.
Diversification helps to reduce and spread economic risk.
4. Recommendations
55. Based on the discussions, this paper recommends that the following actions be taken to address the negative impact of the global financial crisis and recession on the SADC mining sector. The recommendations were reviewed by a meeting of experts, senior SADC Government officials and the private sector in May 2009.
1. In order to protect the economies of the subregion from financial contagion effects, central banks need to implement prudent monetary policies to avoid the collapse of their financial systems.
2. Retrenchment should be the last resort after all alternatives have been exhausted, and it would be preferable that this is done through voluntary separation. Voluntary separation is a reasonable cost-containment strategy. Where retrenchment is unavoidable, dialogue between Government, labour unions and employers will build goodwill and trust, and preclude conflict. In the longer term, there is need to explore flexible wage structures that can meet the challenges faced by the industry.
3. In order to save jobs and maintain the viability of some mines, Governments should adopt a flexible tax system that relieves mining companies of heavy tax burdens during periods of financial stress. Suspension of front- loaded taxes, such as royalties, could be an option.
The negotiation of tax matters also requires healthy dialogue and trust between mining companies and Governments.
Page 15 4. Mining is a strategic industry for the SADC subregion and its citizens cannot continue to
be marginalized. The current crisis could be used as an opportunity to increase the participation of both the State and citizens in mining assets. This must, however, be done on negotiated commercial terms. Deferred royalty payments could be used to increase Government shares, while nationals will need to be empowered to that effect. Namibia and Botswana are good models of State participation.
5. The crisis presents opportunities to encourage manufacturing and diversification.
Diversification could take two forms : intra-sector diversification aimed at produc ing additional minerals; and inter-sector diversification aimed at developing other sectors of the economy, such as agriculture and the manufacture of value-added mineral products.
6. The crisis is also an opportunity to reduce transaction costs by reviewing regulatory frameworks and other obstacles to business start- ups so as to provide for local content in the industry. The crisis should also be used as an opportunity to upgrade infrastructure support for the industry. For example, reduced electricity consumption relieves pressure on available capacity; Governments could invest in upgrading generation and transmission capacities.
7. During the current recession, one sub-sector that has been negatively affected is exploration. Little exploration is currently taking place. Consequently, SADC countries may not be in a position to benefit from the next upswing in mineral commodity prices.
Governments should explore the possibility of providing incentives, especially to young explorers, to enable exploration work to continue.