Elsevier

Resources Policy

Volume 43, March 2015, Pages 101-111
Resources Policy

Chile, copper and resource revenue: A holistic approach to assessing commodity dependence

https://doi.org/10.1016/j.resourpol.2014.10.007Get rights and content

Highlights

  • We assess using theoretical and empirical analysis the status of Chile commodity dependence.

  • We discuss how more balance between export led and demand led growth is beneficial to commodity dependent economies such as Chile.

  • We argue balanced growth is consistent with greater intergenerational equity in use of today׳s non-renewable resources and is consistent with reduced dependence on external demand for commodities and reduced vulnerability to commodity price volatility.

  • We provide empirical evidence on usage of resource revenue flows to the government, private companies, operating expenses, remittances and wages.

  • We show that Chile is not utilizing resource revenue during the current boom in a manner consistent with a more balanced growth trajectory.

Abstract

The first decade of the new millennium has ushered in with it booming commodity prices due mainly to high growth in East Asia. Copper prices in particular have soared 80% between 2001 and 2011, causing Chile, the world׳s largest copper producer, to reap massive windfalls. This paper provides an assessment of Chile׳s commodity dependence with a focus on the manner in which current flows of mining revenue promote sustainable development. The first part of the paper suggests Chile׳s status as a strong commodity producer could be complemented by efforts to achieve a more balanced growth trajectory that would include expansion of domestic demand brought about by rising labor productivity and rising wages and reduced dependence on export demand and foreign savings. We believe such an achievement would greatly promote the fair transfer of resource revenue from exhaustible sources to future generations. In the second part of the paper we provide an empirical assessment of sources and the destination of revenue derived from mineral exports. We focus on usage of revenue flows to government, multinationals in the form of profits and operating expenses, and workers. Our approach is intended to provide a more holistic and meaningful assessment of Chile׳s commodity dependence than what is normally found in the literature. We conclude that while the Chilean government clearly has provided future generations with revenue in the form of offshore sovereign wealth funds, most private resource revenue flows offshore in the form of remittances and profits to multinationals. There is limited use of private and public funds directed at enhancing domestic demand through productive investment.

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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