Chile, copper and resource revenue: A holistic approach to assessing commodity dependence
Introduction
Today Chile is the world׳s largest copper producer and exporter. Together with other net-commodity-producing countries, Latin American economies are in a new phase of re-commodification and deindustrialization largely fueled by rising commodity prices that are due mainly to the rapid growth of China and other emerging market economies (Keller and Arriagada, 2014). This increase in demand for copper, soybeans, iron, gas, and other products is estimated to have nearly doubled exports of commodities from Latin America and, since 1999, have lifted approximately 56 million people into the middle class (Ruiz del Castillo, 2009) .
This is good news for Chile. The country is repeatedly lauded as exemplar in managing revenues from copper mainly in transparent offshore sovereign wealth fund and in containing exchange rate appreciation. The state has been the recipient of an impressive revenue windfall since 2004 thanks to soaring copper prices, and during this period has successfully managed the revenue surge mainly in offshore accounts (Collier and Venables, 2011, Fuentes, 2011, Henry, 2013, Gallagher and Porzecanski, 2010, Mikesell, 1997, Ruiz-Dana, 2007). In addition, with its inflation-targeting rule, Chile was able to use resource revenue to finance counter cyclical fiscal policy during the 2008 financial crisis (Carrière-Swallow and García-Silva, 2013).
Chile, since the return to democracy in 1990, has been an attractive destination for foreign direct investment (FDI) especially related to the exploration for new mineral deposits and the discovery and extraction of base metals, an attraction that has increased significantly after 2004, given the high price of copper (Fernandes and Paunov, 2012). Policy has targeted foreign investors through generous tax and royalty concession; in 2012 Chile had the lowest top corporate tax rate on mining companies in a 22-country study of mining based economies (Canada only had a slightly lower rate) (PWC, 2012). In addition the state is seeking to increase the profitability and competitiveness of the giant state-owned company, Codelco, holder of 10% of the world׳s copper reserve, through ownership shares in foreign mining companies and “other mining partnerships in geological operations both in Chile and abroad” (Keller and Arriagada, 2014). For instance the Japanese mining company, Mitsui, has recently joined the Copper Innovations Investment Fund to partnership with Codelco to find “innovative applications of copper for high value, innovative technologies for more efficient and competitive mining processes, and initiatives for the critical elements of the industry, such as water and energy” Keller and Arriagada, 2014. These and other initiatives have increased substantially the role of foreign multinational corporations (MNCs) in the extraction and export of copper and copper byproducts over the last decade.
In view of its success at attracting foreign investment in the mining sector, the compelling question is whether resource revenue, which represents an asset for future generations (Colliers and Venables, 2011), is being put to the best use. The question of best use is broad and widely defined in the literature. The first half of this paper addresses the issue of best use by emphasizing how a balanced growth economic-development strategy could complement the growth through commodity export strategy by harnessing more efficient use of non-commodity resources. In turn this strategy could potentially strengthen domestic resilience to changes in foreign demand for copper and other potentially adverse and unforeseen global economic events. The second part of this paper provides an empirical assessment of how current mining revenue is allocated among governments, multinational corporations and other private firms and workers, and in what manner revenue is utilized. The empirical section will utilize relevant literature on resource curse and the political economy of resource revenue management, global value chain analysis with attention to the firm level, and literature on external and institutional constraints associated with mining revenue management.
This paper will proceed as follows. Section “Using resource revenue for the future” provides an overview of the Chilean economy during the current commodity boom, addresses government use of revenue to ensure intergenerational equity and to mitigate Dutch disease effects, and makes a case for sustainable development via balanced growth. Section “Analysis of mining revenue flows” identifies resource flows and analyzes usage of flows using as a benchmark the attainment of growth through generation of domestic demand. Section “Conclusion” presents conclusions and suggests ways to improve allocation of copper windfalls.
Section snippets
Using resource revenue for the future
The issue of intergenerational equity or the sharing of wealth generated from exhaustible resources between current and future generations is an important consideration for resource rich countries when designing strategies for the management of funds. Hartwick (1997) suggests countries must avoid “the ethical problem of the current generation shortchanging future generations by over-consuming the current product, partly ascribable to current use of exhaustible resource.” The sharing of current
Analysis of mining revenue flows
Section “Using resource revenue for the future” provides a framework within which to assess usage of commodity revenue. The framework is provided by balanced growth literature which emphasizes the need to achieve balanced growth between commodity exports and domestic demand. In this manner Chile would ensure rising incomes of Chilean workers through increased labor productivity and increased demand for skilled labor. In addition, Chile would reduce vulnerability to foreign forces, and
Conclusion
The first part of the paper addressed literature on best usage of resource revenue for developing commodity exporters such as Chile. It focused on literature proposing that countries aim for a more balanced growth trajectory through the strengthening of domestic demand. Achieving growth through a combination of commodity export and rising domestic demand is important to counter vulnerabilities arising from too high dependence on demand especially from rich countries given the projection that it
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