Anja Benshaul-Tolonen, Paula Fernandez Musso
The macroeconomic natural resource curse literature has identified volatility as a potential contributor to lower economic growth in resource-rich countries. We provide microeconomic evidence on how fluctuations in monthly mine-level copper production propagate through domestic production networks using 22 million domestic transaction and customs import records in Zambia. The 10 large copper mines account for approximately one-fifth of the annual value of VAT-reported domestic transactions, highlighting their centrality to Zambia’s economy. A 1% increase in copper production is associated with a 0.516% increase in mines’ domestic procurement. Mines’ imports also respond to production changes, but less elastically. Chinese majority-owned mines have lower domestic procurement levels but stronger procurement responses to production fluctuations. Tier 1 suppliers’ domestic procurement and imports increase by 0.07% and 0.1%, respectively, in response to a 1% increase in their mining customers’ production. The results are robust to instrumenting the monthly mine copper production with a shift-share copper price instrument. Mining volatility can generate substantial fluctuations in demand faced by domestic firms: a one-standard-deviation decline in mine-level copper production predicts a 23.4% contraction in mines’ domestic procurement, equivalent to 4.7% of total VAT-reported domestic B2B transaction value if all mines experience such a decline simultaneously. As countries endowed with critical mineral deposits seek to expand mineral production and strengthen backward linkages, mitigating exposure to the sector’s inherent volatility must be a policy imperative.
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