The Zambian economy has traditionally moved in tandem with fluctuations in the international price of copper. High prices meant higher income and encouraged increased production that further boosted export revenues. Yet lower copper prices had precisely the opposite effect, resulting in a downward spiral that no amount of government interference could alter. Government finances are currently benefiting from record copper prices over the past two years, but how will the country cope now that prices are again falling?
Zambia is a perfect example of an African economy that is over dependent on the export of raw materials. While the economies of Gabon and Equatorial Guinea are precariously balanced on oil exports, Lusaka has relied on copper as its drug of choice. There have long been calls for diversification in order to avoid the boom and bust of previous decades but little headway has been made in this direction in Zambia as elsewhere in Africa.
The international price of copper increased from just $1,319 a tonne in 2001 to a record $8,800 by May 2006 but fell during the rest of 2006, dropping to $5,389 by early February 2007. Rising global stockpiles also pointed towards supply outstripping demand and cuts in output in many producing states are likely. While other commodity prices, such as those for nickel, tin, coffee and grain, remain strong, copper's fortunes seem to have faltered on lower demand in the US, although Chinese consumption continues to rise.
However, there are some signs that the fall in prices may not have quite the same impact upon the Zambian economy as in the past. Firstly, prices are still four times greater than in 2001 and providing they do not fall much further this should encourage continued investment in Zambian mines.
At the same time, other parts of the Zambian economy may be able to sustain current levels of growth. The horticulture and tobacco sectors were developed in order to broaden the economic base but higher copper prices triggered the appreciation of the Zambian currency, which makes Zambian agricultural exports less competitive. Nevertheless, export orientated agriculture continues to create employment and a collapse in the sector is not expected.
Investment boosted production
The Zambian economy may also prove more resilient because of reforms in the copper industry. While it is true that production has been cut in the past when prices were low, inefficiencies...