Copper dependence and a proposed special economic zone

Vulnerability is high because copper affects the economy through several channels at once, not just through mining jobs.

• Export earnings: copper is 58% of goods exports. A price fall reduces foreign exchange earnings, which limits imports of fuel, machinery and consumer goods.
• Government revenue: copper contributes 31% of government revenue. A price fall would force spending cuts or borrowing, affecting education, health and the proposed loan repayment.
• GDP and growth: mining is 7% of GDP, so a price fall would directly slow growth. The 4.8% growth rate is therefore more fragile than it appears.
• Employment: only 2.5% of workers are directly employed in mining, so direct job losses would be limited. But the fiscal channel would hit the 54% informal workforce through lower public spending, and the Gini coefficient of 0.52 suggests that the poor are least able to absorb the shock.
• Limited diversification: manufacturing has fallen from 14% to 9% of GDP, so there is no large export sector to offset a copper decline.

Judgement: the economy is a classic resource-dependent economy. The small employment share does not mean low vulnerability, because the state budget and foreign exchange depend heavily on copper. A price fall would be transmitted through fiscal and macroeconomic channels even if few miners lose jobs.

SEZ strengths:

• The site is 22 km from the port, which is good for exporting electronics.
• Tax holidays and a dedicated zone could attract foreign investment, create formal jobs and begin diversification away from copper.
• Electronics can raise manufacturing's share of GDP and provide foreign exchange.

SEZ weaknesses:

• Power fails 8 days a month, which is a serious obstacle for electronics assembly. Firms may need their own generators, raising costs.
• Only 38% of the local workforce has completed secondary education, so firms may bring in skilled workers or find the skills shortage a deterrent.
• Tax holidays reduce the revenue that is meant to repay a copper-backed loan. If copper prices fall, the loan becomes harder to service.
• The zone may become an enclave, importing components and repatriating profits, with weak links to local firms.

Education and rural roads:

• They address binding constraints: skills and market access. Roads help farmers and rural firms reach markets; technical education raises the supply of workers.
• They are slower and may not attract foreign investment on their own, but they make the SEZ more likely to succeed.

Judgement: the options are not mutually exclusive. The SEZ is unlikely to work well while power is unreliable and skills are low. A defensible strategy is to fix power and expand technical education first, then phase the SEZ with performance requirements. Spending the entire US$2.1 billion on tax holidays would be risky.

The multiplier depends on how much of each initial spend is re-spent locally rather than leaking abroad.

SEZ:

• Foreign electronics firms may import components, machinery and even managers, so a large share of each dollar leaves the country.
• Tax holidays mean the government captures less revenue, reducing the public spending that could circulate locally.
• Repatriated profits are a leakage.
• However, local wages, construction, catering and transport can create some local multiplier, especially if the zone buys services from nearby firms.

Rural roads:

• Construction spending employs local labour and suppliers, so more of the initial spend may stay in the region.
• Better roads lower transport costs for farmers and traders, raising incomes and allowing more local spending.
• But if farmers sell raw crops abroad and buy imported inputs, some of the gain leaks out. The multiplier is stronger if processing and retailing are local.

Judgement: the SEZ may have a higher gross investment but a lower local multiplier because of imported inputs and tax holidays. Rural roads may have a smaller initial spend but a higher local share, especially if they link farmers to local markets. The comparison should therefore use net local value added, not just the size of the investment.