ICMM
The International Council on Mining and Metals (ICMM) is a CEO-led
organization comprising many of the world’s leading mining and
metals companies, as well as regional, national
and commodity associations, all of which are committed to
improving their sustainable development performance and to the
responsible production of the mineral and metal resources society
needs.
ICMM’s vision is a viable mining, minerals and metals industry
that is widely recognised as essential for modern living and a key
contributor to sustainable development.
www.icmm.com
Chile The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
UNCTAD
Established in 1964, UNCTAD promotes the developmentfriendly integration of developing countries into the world
economy. UNCTAD has progressively evolved into an authoritative
knowledge-based institution whose work aims
to help shape current policy debates and thinking on development,
with a particular focus on ensuring that
domestic policies and international action are mutually supportive
in bringing about sustainable development.
www.unctad.org
The World Bank Group
The World Bank Group is an international organization of
more than 180 member countries comprised of five institutions:
the International Bank for Reconstruction and Development (IBRD)
and the International Development Association (IDA), together
known as the World Bank; the International Finance Corporation
(IFC); the Multilateral Investment Guarantee Agency (MIGA); and
the International Center for the Settlement of Investment Disputes
(ICSID).
The World Bank is a vital source of financial and technical assistance
to developing member countries. IBRD provides
low-interest loans to middle-income countries and IDA provides
interest-free credits and grants to low-income countries for
education, health, infrastructure, and other purposes to promote
poverty reduction and sustainable development.
IFC promotes sustainable private sector investment in developing
countries as a way to reduce poverty and improve people’s lives.
www.worldbank.org
www.icmm.com
ICMM
6th Floor North
35 Portman Square
London W1H 6LR
United Kingdom
Printed at United Nations, Geneva
GE.08-50808–April 2008–1,000
UNCTAD/DITC/COM/2007/2
Telephone: +44 (0) 20 7467 5070
Fax: +44 (0) 20 7467 5071
E-mail: [email protected]
or [email protected]
Chile
The Challenge of Mineral Wealth:
using resource endowments to foster
sustainable development
March 2007
Country Case Study
Contents
Executive summary
3
Chapter 1 Introduction
1.1 Objectives
1.2 Consultees
1.3 Report layout
7
8
8
8
Chapter 2 Chile’s economic, social and political background
2.1 Chile’s people
2.2 The chilean economy
2.3 Brief history of chile
2.4 Chile’s governance structures
11
12
12
13
14
Chapter 3 The quantitative contributions of mining to economic
growth and poverty reduction at the national, regional and local level
17
3.1 Overview
18
3.2 Macroeconomic and social contributions of the mining sector
at the national level
18
3.3 The contributions of mining to economic and
social performance at the sub-national level
25
3.4 Mining at the local level
26
3.5 Mining in region ii
29
3.6 Comparing regional and national socio-economic development trends 35
3.7 Escondida’s role in regional economic development
37
3.8 Conclusions
41
3.9 Summary
41
Chapter 4 What is the linkage between mining investment and
economic growth and poverty reduction?
4.1 Overview
4.2 The impact of economic policies on outcomes at the national level
4.3 Do institutions and governance structures provide the linkage?
43
44
44
47
Chapter 5 What are the reasons behind the ‘success factors’?
51
5.1 Overview – the story so far
52
5.2 Legal framework and regulatory environment for mining
52
5.3 The political-administrative system
55
5.4 Fiscal issues, at the national and sub-national level
59
5.5 Social cohesion: social tensions, conflict prevention and conflict mitigation
59
5.6 Private sector development and human capacity development
59
Chapter 6 Conclusions and implications
63
Chapter 7 Bibliography
65
Chapter 8 Acknowledgements
69
Chapter 9 Annexes
Annex 1 additional tables complementing section 3 of the main report
9.1 National statistics
9.2 Millennium development goals – summary for chile
71
72
72
72
Annex 2 Chile’s performance on governance indicators
10.1 Governance performance in recent years
10.2 The world bank governance indicators
10.3 Unu world governance survey
10.4 Conclusions
77
77
77
79
82
Annex 3 Brief political history of chile
11.1 Introduction
11.2 From independence until the 1930s
11.3 From the 1930s to the early 1970s
11.4 The military regime from 1973 to 1989
11.5 Democracy since 1990
83
83
83
83
84
84
Annex 4 Government comments
86
Synthesis of four Country
Case Studies
Findings and recommendations
Preface
In the past five years, the economic, social and
environmental dimensions of mining and minerals
have been the subject of wide-ranging consultation,
critical comment, research and analysis. The
Mining Minerals and Sustainable Development
Project (MMSD) and Extractive Industries Review
(EIR) respond to the unprecedented focus of
public attention on the sustainable development
challenges for extractives in general and mining in
particular.
In May 2004, ICMM initiated its Resource
Endowment initiative to better understand how
large scale mining activity in low and middle
income countries can enhance the socio-economic
development of host countries. The initiative aims
to isolate the drivers of development effectiveness
in the mining and metals sector and to document
the policy frameworks, operational practices,
and partnership arrangements that deliver
sustainable outcomes on the ground. This actionresearch project is being done together with
UNCTAD and the World Bank Group. ICMM also
consulted stakeholders such as mining companies,
governments, donor agencies, labor and nongovernmental organizations (NGOs).
●
●
●
●
Much of the ‘resource curse‘ literature has focused
on problems rather than solutions. Consequently it
is not of much practical help in designing improved
policy or filling gaps in knowledge. For example,
how have apparently ‘successful‘ countries
avoided problems now so widely perceived? Can
such outcomes be repeated in other developing
economies endowed with an abundance of mineral
resources? How should the main stakeholders
work together to enhance positive socio-economic
outcomes from mining investments?
To help bridge these gaps, some of the specific
questions the Resource Endowment initiative
attempts to address are:
The MMSD project was an independent two-year process begun in April
2000 of consultation and research with the objective of understanding
how to maximise the contribution of the mining and minerals sector to
sustainable development at the global, national, regional and local levels.
MMSD was managed by the International Institute for Environment and
Development under contract to the World Business Council for Sustainable
Development (WBCSD).
The Extractive Industries Review was announced in 2000 by the World
Bank Group as a comprehensive review of its activities in the extractive
industries sector in response to concerns expressed by a variety of
stakeholders, primarily environmental and human rights organizations.
The Review was completed in 2004.
The International Council on Mining and Metals.
“The Challenge of Mineral Wealth: using resource endowments to foster
sustainable development”. The initiative is managed by Kathryn McPhail,
Principal, ICMM.
●
ow the mining sector overall contributes to
H
national development?
What strategies have been effective in managing
revenues generated by natural resources for
sustainable development and poverty reduction?
How an individual mining project contributes
to development at national, regional and local
levels?
What are the practical and policy implications for
mining companies, host country governments,
development institutions, and NGOs?
What might the distinct responsibilities
of these development partners be to
support implementation of findings and
recommendations?
The three distinct phases of the initiative and
related products are outlined below.
Phase 1: Analytical Framework and Tools
The initial phase of the project concentrated on the
development of an analytical framework focusing
on governance processes, including the underlying
factors and rules of the game that affect social
and economic interactions and outcomes. These
aspects were incorporated into a practical Toolkit to
assess local, regional and national socio-economic
impacts of mining. The Toolkit also deals with
how mining operations impact on governance
structures, institutions and policy changes at
different levels of government. Phase 1 involved
an extensive literature review, and a ‘coarse-sift’
comparative analysis of the relative economic
and social well-being of 33 countries with a high
dependence on minerals. Initial findings were
critiqued in a multi-stakeholder workshop which
helped to shape a revised approach.
Phase 1 Published reports:
●
●
nalytical Framework: Executive Summary
A
Resource Endowment Toolkit
Phase 1 Additional Online Resources:
●
●
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nalytical Framework: Main Report
A
Literature Review
November 2004 Workshop proceedings
Phase 2: Testing, Synthesis and Emerging Lessons
This involved applying the Toolkit to two main
and two comparator countries, Peru (with Chile
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
1
2
as a comparator) and Ghana (with Tanzania as
a comparator). In all four countries, mining had
shown some evidence of having successfully
contributed to economic and social improvements.
The purpose was to test the Toolkit, to assess
whether it could be applied to a broader set of
mining countries, and to propose refinements.
The findings were reviewed by a second multistakeholder workshop which provided valuable
feedback.
Phase 2 Published reports:
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our country case study executive summaries
F
Synthesis report of findings of the four case
studies
Phase 2 Additional Online Resources:
●
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hana, Tanzania, Peru and Chile country case
G
studies
October 2005 Workshop proceedings
In addition, a number of other publications
summarize the process or findings of both Phases 1
and 2 and signal ICMM’s approach to Phase 3.
●
●
Spotlight series that summarizes key aspects of
A
Phases 1 and 2 (The Prize; The Challenge; Ways
Forward; and Process and Feedback)
Resource Endowment Guide to Phases 1, 2 and 3
Phase 3: Action Learning through Partnerships
The activities of Phase 3 will include a number
of ‘pilot projects’ in partnership with others to
encourage uptake of the Phase 2 recommendations
and, as a consequence, enhance the contribution of
mining to social and economic development. Phase
3 will also focus on dissemination and outreach.
For the latest information on Phase 3, including
details of pilot activities and partners visit www.
icmm.com
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Executive Summary
Background to the ICMM Resource Endowment
initiative (Chapter 1)
manufactured goods. The direction of trade has
changed in a manner typical for many countries
in Latin America, with other developing countries
increasingly becoming important trading partners.
This report has been prepared on behalf of the
International Council on Mining and Metals (ICMM)
for Phase II of the Resource Endowment initiative.
The initiative aims to demonstrate how mining by
large international firms contribute to the socioeconomic development of host countries and how
these contributions can be improved.
Phase I of the initiative developed a methodology
(the ‘Resource Endowment Toolkit’) to assess the
positive and negative socio-economic impacts of
mining. Phase II tested this Toolkit on four country
case studies. This report provides an assessment
of the socio-economic impacts of mining in Chile
at the national, regional and local levels, the latter
with reference to the Escondida mine.
Chile’s economic, social and political background
(Chapter 2)
Chile has a population of about 15.8 million people,
the majority of whom live in urban areas. About
a third of Chile’s population lives in the capital
Santiago. Chile has had a history of democratic
rule for nearly two centuries, interrupted only by a
short spell of authoritarian rule in the early 1920s
and the military government of General Pinochet,
which lasted from 1973 to 1990. Since 1925 the
Chilean Constitution set out a presidential system
of government overseen by a bicameral legislature,
a Congress and a Senate. Chile shares with other
Latin American presidential systems the dominance
of a strong executive with considerable legislative
powers.
In 2003 Chile had a GDP per capita of US$5,216,
the highest in South America. Over the period from
1990 to 2003 annual growth in GDP was on average
5.4%. Agriculture accounts for 5% of GDP, industry
for 35% (including mining for 8% in 2003), and
services for 54%. Since 1990, services have grown
relative to mining, although this trend was at least
temporarily reversed in 2004. Real wages increased
by 2.4% per year on average from 1994 to 2004.
Chile has an open trade regime with low and
uniform tariffs. Export value grew at more than 10%
per year on average during the 1990s but slowed
down in the new century, partly due to low copper
prices. The mineral sector dominates exports,
which are relatively concentrated. However, Chile
has succeeded in diversifying its exports and has
become an important exporter of fruits and some
From 1984 to 1999, an active exchange rate policy
was pursued, where the rate was allowed to
fluctuate within a band. This was complemented
by a relatively loose monetary policy and an
austere fiscal policy. The aim was to avoid real
exchange appreciation and, in fact, to encourage
real exchange rate depreciation in order to protect
the international competitiveness of the tradables
sectors. In 1999 Chile adopted a floating exchange
rate policy. At the same time, the burden of
maintaining the real exchange rate at a competitive
level was shifted to the monetary policy, with the
adoption of inflation targets by the Central Bank.
Foreign direct investment (FDI) is large and much
has been directed towards mining, which accounted
for one third of all foreign direct investment from
1974 to 2004. However FDI in the services sector
has also been growing rapidly and in some recent
years has overtaken mining investment.
The quantitative contributions of mining to economic
growth and poverty reduction at the national, regional
and local level (Chapter 3)
At the macroeconomic level, the mining sector has
made considerable contributions and investment in
mining has sharply increased since the late 1980s.
With the exception of the currency appreciation and
subsequent crisis in the early 1980s, there appears
to have been no long-lasting signs of ‘resource
curse’ since the overthrow of Allende and the
introduction of neo-liberal economic policies. The
recent very large increases in the price of copper
and the consequent rapidly rising export income
may, however, constitute a renewed challenge for
Chilean authorities to deal with Dutch Disease. It
is probably significant that, since 2002-2003, the
nominal exchange rate vis-à-vis the US dollar has
risen by close to 50%. This appreciation could hurt
the competitiveness of non-mining export sectors
in the long run.
Improvements in living conditions and the reduction
of poverty have been impressive, with the amount
of people living in poverty decreasing by nearly
50% since 1990. The channeling of government
tax revenue from mining into investment in social
development appears to have played an important
role in this process.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case Studies
Findings and recommendations
Executive Summary
4
The fact that mining revenue is not earmarked for
redistribution to mining regions suggests that the
directly identifiable positive economic and social
impact of the mining industry at the regional level
has not primarily taken place through redistributive
measures. It appears to have resulted from
synergetic and complementary economic activities
that have delivered inputs to, or have benefited
from, the presence of the mining industry.
Chile’s Region II, in the north of the country, has
experienced faster economic growth than Chile as
a whole, resulting in per capita income being about
twice as high and poverty having fallen dramatically.
Region II also outperforms almost all other regions
on most non-monetary human development
indicators such as literacy. At the same time,
subjective indicators, as well as interviews on site,
reveal some concern over ‘quality of life’ issues.
Some of these concerns no doubt arise from
what could be described as ‘growth pangs’ in an
environment characterized by rapid economic and
social change. Some may have more to do with
the physical and geographical features of Region
II, with its lack of vegetation and remoteness from
major urban centers.
The mining industry in Region II has established
unusually strong linkages with the local economy.
Local suppliers to mining companies have
flourished, partly as a result of deliberate targeting
and fostering of local suppliers on the part of
mining companies, particularly Escondida. Mining
companies and the Government have also jointly
supported the establishment of a ‘mining cluster’,
particularly by providing finance for suppliers
seeking to obtain ISO 9000 and 14000 certifications.
What is the linkage between mining investment
and economic growth and poverty reduction?
(Chapter 4)
Chile unambiguously leads the region in terms of
standard measures for the quality of governance.
Chile’s institutions and governance structures and
its policy processes have not only achieved positive
macroeconomic results at the aggregate level;
Chile has also managed to activate synergies and
complementarities between different economic
sectors and trickle down mechanisms, with which
other countries are struggling.
It appears that Chile’s governance structures
and policy processes have encouraged private
sector activities by different-sized enterprises,
and across different economic sectors, which have
reduced poverty through employment creation.
Chile’s public sector has also struck a balance
between providing an enabling environment for the
private sector and the provision of public goods
and services that help to redistribute economic
wealth. It is not obvious how this has been achieved,
although there are two preliminary leads. First, the
UNU World Governance Survey suggests that the
country has established a specific pattern of policy
consultations and that this type of collaboration
between public institutions and the private sector
has been an important factor contributing to the
country’s economic success. Second, although
the quality and magnitude of investment in human
capital has improved considerably, the single
largest contribution to poverty reduction during
the 1990s has come from additional employment
opportunities, most of which have taken place in
newly emerging industries, rather than Chile’s
traditional export industries. In this context, it
would appear that the mining sector has played
a kick-starting role in facilitating and stimulating
other economic activities.
What are the reasons behind the ‘success factors’?
(Chapter 5)
Chile is generally considered to offer a stable and
favorable legal environment to mining. Recent
changes to Chilean mining tax legislation, which
were introduced following a heated debate, do
not appear to have fundamentally changed this
characterization. The fact that the decision was
taken in a highly transparent manner is likely to
have strengthened the confidence of all parties in
the fairness of the process by which the system for
distribution of mineral rents is shaped.
An important element in Chile’s public financial
management system is its structural surplus rule
introduced in 2000. This rule targets a cyclically
adjusted fiscal surplus of 1% of GDP in the
public accounts. Under the rule, the Government
saves all copper revenues from the State owned
copper mining company Codelco above a longterm reference price for copper. Other central
government revenue is smoothed over the business
cycle, using an estimate of potential output.
The budget law then sets an aggregate central
government expenditure ceiling, which is 1% of
GDP, below this structural revenue. The structural
surplus rule has provided a useful tool for policy
making for budget preparation, helping to set
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case
Studies
Phase
1 Report Summary
Findings and recommendations
revenue targets and expenditure ceilings. Recently,
higher revenue from increases in copper prices has
brought about overall surplus, which have been
sterilized and used selectively to repay public debt.
When economic growth is below trend, as during
2000-2003, the structural surplus rule allows the
government to run deficits.
Conclusions and implications (Chapter 6)
Since the 1980s, Chile has practiced cautious and
appropriate policies that have allowed the country
to retain macroeconomic balance in spite of
considerable variations in mineral export revenues
and a pronounced boom in mining investment.
Chile has achieved export diversification,
particularly into agricultural products. High and
broad based economic growth has resulted in
strong employment growth and, together with
government social expenditure, this has driven
down poverty levels. The Copper Stabilization Fund
has played a crucial role in smoothing fluctuations
in government expenditure, thus helping both
to maintain macroeconomic stability and to
provide the steady levels of funding necessary for
sustainable social programs. At present, Chile is
faced with the need to diversify into more skill and
knowledge intensive industries. Its great advantage
is that Chile faces less of a budgetary constraint in
raising levels of expenditure on higher education
and research than other countries at its income
level, and should be able to successfully manage
the transition from ‘Latin American problems’ to
‘European problems’.
The question that could be asked is whether Region
II will continue as a mining region or if it will have a
more diversified economic structure in the future.
As long as the region continues to attract mining
investment at the present rate, the answer to this
question will have to be postponed.
The problem that was posed at the beginning of
the work on the Resource Endowment initiative
was why some countries navigate safely around
the obstacles to economic development that face
mineral dependent countries while others capsize.
In the case of Chile, an important part of the answer
appears to be an atmosphere of cooperation and
compromise both across the political spectrum
and between different actors in society. This
cooperation and compromise is most important and
visible between government and industry, but also
exists with other parts of civil society, including
universities and associations in crucial supporting
roles. The deeper question, therefore, is whether
such an atmosphere can be replicated in countries
that have not been able to acquire it by other
means.
The highly positive economic and social
development in Region II has by and large come
about as the result of strong economic growth,
reinforced by close linkages between the mining
industry and other sectors of the local economy.
These linkages have been promoted by the mining
companies, particularly Escondida, and it is likely
that they would have been considerably weaker
without this active promotion. The efforts to build
linkages do, however, go beyond simply nurturing
suppliers on an individual basis. The mining cluster
in Region II (which, although concentrated to that
region is not limited to it) was a joint initiative
by the national Government and the mining
companies in Region II. It has focused not just
on adapting suppliers’ practices to the needs of
their Region II customers, but also on raising their
competitiveness in international markets.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
5
Introduction
1
1. Introduction
1.1 Objectives
This report has been compiled for the Resource
Endowment initiative of the International Council
on Mining & Metals (ICMM), and was prepared by
Evelyn Dietsche and Paul Stevens, Oxford Policy
Management (OPM), Ian Emsley, Anglo-American,
and Olle Östensson, UNCTAD. Since the report has
not been formally cleared by the organizations, the
views expressed are those of the individual authors
and do not necessarily represent those of the
respective institutions.
managed copper mine Escondida, which is located
in Chile’s Region II in the Atacama Desert.
Region II is in the north of the country and
Escondida is situated approximately 170 km away
from the city of Antofagasta. It was the first foreign
owned mine in the region, and has been followed by
several others since Chile’s return to democracy in
1990.
The objective of the country case studies is to
answer the following three questions:
●
The objective of the Resource Endowment
initiative is to study how the economic and social
contributions of large mining projects can be
enhanced. Phase I of the initiative took place
from July 2004 to January 2005 and developed an
analytical framework for this study. It has been
summarized in a Resource Endowment Toolkit
which has been extensively peer reviewed by
social development specialists and economists in
academia, non-governmental organizations and
government.
Phase I has benefited from inputs from a wide
range of stakeholders at a workshop held in London
in November 2004. Many of the stakeholders
have been critical of aspects of mining company
performance in the past. Their views have
actively been sought to ensure that the Resource
Endowment initiative addresses the concerns of a
wide range of interested stakeholders.
●
●
1.2 Consultees
A very wide range of stakeholders were consulted
during the preparation of the case study as shown
in Box 1. The authors would like to emphasize that
agreement to be consulted should not be taken as
endorsement of the objectives of the study, or of the
findings of this report.
1.3 Report Layout
Phase II of the initiative tests and validates the
analytical framework (in terms of its usability)
developed during Phase I. It conducts four country
case studies, for which this report on Chile is one.
The other three country case studies are Ghana,
Peru and Tanzania. All four countries are heavily
dependent on mining and in recent years have
performed relatively well. Ghana and Peru were
chosen as the two major case studies and two
consultant teams conducted country visits. Tanzania
and Chile serve as comparator country cases. The
studies of Tanzania and Chile have largely been
desk-based and are not as detailed as the Ghana
and Peru studies.
Chile has a considerable number of mines in both
the development and operational phases. Many
new investments have taken place over the past
15 years. To examine impacts at the local level
this case study has focused on the BHP Billiton
How has mining contributed to national
development?
How has the Escondida mining investment
contributed to development at the national,
regional and local levels?
What national, regional and local governance
structures and policies have been effective in
explaining the outcomes of both the mining
sector as a whole and Escondida in particular?
Have revenues generated by mining enhanced
sustainable development and poverty reduction?
Box 1 List of Consultees
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Escondida management in Santiago and Antofagasta;
management of the Escondida foundation;
representatives of Escondida labor unions;
Government authorities in Santiago and Antofagasta;
local NGOs and community groups;
national universities, in Santiago and Antofagasta;
representatives of local government in Antofagasta;
representatives of business associations in Antofagasta,
including representatives of small scale miners
association;
representatives of other mining companies; and
suppliers to Escondida
This case study report presents the following:
●
Chapter 2 provides basic social, economic and
political background information on Chile;
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case
Studies
Phase
1 Report Summary
Findings and recommendations
●
●
●
●
Chapter 3 illustrates the quantitative contributions
of mining to economic growth and poverty
reduction at the national, regional and local level;
Chapter 4 summarizes the linkage between
mining investment and economic growth and
poverty reduction at the national level;
Chapter 5 explores more deeply the reasons
behind Chile’s achievements and ‘success
factors’;
Chapter 6 draws together the conclusions and
implications of the previous chapters.
The following Annexes provide supporting
information:
●
●
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●
Annex 1 provides additional tables complementing
Chapter 3 of the main report.
Annex 2 gives a detailed assessment of Chile’s
performance on the World Bank’s Governance
Indicators and the UNU World Governance Survey.
Annex 3 summarizes Chile’s recent political
history.
Annex 4 presents Government comments
regarding this case study
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Chile’s Economic, Social
and Political Background
2
2. Chile’s Economic, Social and Political
Background
12
2.1 Chile’s People
Chile’s population of about 15.8 million people
is not among the largest of the Latin American
countries. Its people are often described as
homogenous and lacking regional differentiation.
Nearly 70% of the population are ‘mestizos’
and more than 20% are of European decent.
Amerindians make up a small minority of little
more than 5%. Europeans include not only those
of Spanish decent, but also descendents of other
European countries and the Levant who immigrated
in the 19th century. Many of the latter became
prominent entrepreneurs and professionals. In
general, those of European background are better
off in socio-economic terms.
The majority of Chileans (more than 85%) live in
urban areas. Migration from rural areas started in
the 1930s, much earlier than in most other Latin
American countries. Internal migration between
urban centers is said to be high. About a third of
Chile’s population lives in the capital Santiago.
Segregation by income levels within Chile’s cities
tends to be high and reflects differences in living
conditions and service provisions. Cities commonly
contain relatively large housing developments
(poblaciones) many of which were constructed with
subsidized loans. This has facilitated a relatively
high percentage of home ownership (60%).
2.2 The Chilean Economy
In 2003 Chile’s GDP per capita of US$5,216 was
the highest in South America and reached three
quarters of Mexico’s GDP per capita. Over the
period from 1990-2003 annual growth in GDP
was on average 5.4%, which was higher than the
regional average. Growth in 2000-2003 fell below
the long-term average, but due to the rise in copper
prices it is estimated to have accelerated again in
2004.
Chile’s military dictatorship introduced liberal
economic policies in the mid 1970s, reversing
attempts of previous governments to adopt a
state-led economic system. Democratically elected
governments since 1990 have maintained the basic
principles of a liberal economic order. Chile’s
external economic relations are liberalized, and
apart from temporary controls on short-term
capital flows, the capital accounts have also been
opened. The domestic economy is flexible and,
Unless otherwise indicated, data in this section is from UNCTAD, 2004.
compared to other countries in the region, the
Government appears to prefer using a light touch in
regulation. Foreign investment has been strongly
encouraged for the past three decades, including in
the mining sector. However, large investments have
only taken place since the restoration of democracy
in 1990.
The structural composition of GDP shows growth
in the share of consumption (household and
government) since the 1990s, from 71% in 1990 to
76% in 2003. Gross capital formation remains at a
respectable level at 22%, compared to 26% in 1990.
Agriculture accounts for 5% of GDP, industry for
35% (including mining for 8% in 2003), and services
for 54%. Since 1990, services have grown relative
to mining. This was reversed in 2004. Real wages
increased by 2.4% per year on average from 1994
to 2004. Taken together with the growth in GDP,
and since employment increased at an annual rate
of 2%, this implies that a large part of employment
growth took place at the lower end of the income
scale .
Chile’s trade regime is open with low and uniform
tariffs. For imports from countries with which it
does not have a trade agreement, Chile applies a
flat rate tariff, which fell to 6% in 2003, concluding
a five year program of annual 1% reductions.
This program, along with a number of free trade
agreements and few non-tariff measures, makes
it one of the world’s most open economies with an
average effective tariff of 2.1% in 2004. Export value
grew at more than 10% per year on average during
the 1990s but slowed down in the new century,
partly due to low copper prices. They recovered in
2003-2004 when copper prices again began to rise.
The mineral sector dominates exports, which
are relatively concentrated . However, Chile has
succeeded in diversifying its exports and has
become an important/exporter of fruits and of some
manufactured goods. Agricultural commodities
increased their share of total exports from
32.6% in 1990 to 37.1% in 2003, and the share
of manufactures increased from 9.8% to 15.6%.
Meanwhile, the share of minerals and metals in
exports fell from 54% to 42%. Copper accounted for
37% of all exports. As a result of the large copper
Instituto Nacional de Estadísticas, www.ine.cl
The concentration index, which measures the degree to which one or a
few products dominate exports (measured at the SITC 3 digit level), is 0.274
in the case of Chile, which is higher than the regional average of 0.199 and
highest of all large Latin American countries except oil exporters Ecuador
and Venezuela (UNCTAD, 2004, Table 8.2A).
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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price increases in 2004, the relationships took a
turn, with mineral exports accounting for close to
50% of total exports that year .
Manufactured goods are the most important import
category, accounting for 75% of imports in 1990
and 70% in 2003. The main items in this category
are different types of machinery and vehicles, while
fuels were 16% of imports in 1990 and 19% in 2003.
For a large part of its energy needs Chile depends
on natural gas from Argentina. This applies in
particular for power generation, where 25 to 40% of
power is generated using natural gas .
The direction of trade has changed in a manner
similar to that of some other countries in Latin
America (although the way that the change
has come about may differ from one country
to another), with other developing countries
increasingly becoming important trading partners.
Trade with developing Asian and with other Latin
American countries in particular has almost
doubled in relative importance, from 22.5% of
exports and 29% of imports in 1990 to respectively
39% and 51% in recent years. Part of the reason
for this development is of course the very rapid
increase in demand for minerals and metals,
including copper, in Asia. But it also reflects the
growing economic integration of Latin America
and Chile’s growing trade with other countries in
the region, often within the framework of trade
agreements.
Traditionally Chile has had an export surplus for
goods and a deficit for services (with imports
of services growing rapidly in recent years), but
the trade balance has consistently been positive.
Payments to foreign investors have contributed to
keeping the current account in deficit.
Chile has used a variety of different exchange
10
rate policies over the past two to three decades.
From 1984 to 1999, an active exchange rate policy
was pursued, where the rate was allowed to
fluctuate within a (rather broad) band. This was
complemented by a relatively loose monetary
policy and an austere fiscal policy. The aim was to
avoid real exchange rate appreciation and, in fact,
to encourage real exchange rate depreciation in
order to protect the international competitiveness
of the tradables sectors. In 1999 Chile adopted a
Gobierno de Chile, 2004, p. 22.
Metal Bulletin, 2005b, p. 6.
For a review of Chilean exchange rate policy over the past couple of
decades, see Morandé, 2001.
floating exchange rate policy. At the same time,
the burden of maintaining the real exchange rate
at a competitive level was shifted to the monetary
policy, with the adoption of inflation targets by the
Central Bank.
Foreign direct investment (FDI) is large and much
has been directed towards mining, which accounted
for one third of all foreign direct investment from
1974 to 2004 (Comisión Chilena del Cobre, Cochilco,
www.cochilco.cl). However, FDI in the services
sector has also been growing rapidly and in some
11
recent years has overtaken mining investment .
In 2003, Chile was the third largest recipient of
FDI and had the third largest stock of inward FDI
in Latin America, in both cases after Mexico and
Brazil. Chile is ranked the highest among Latin
American countries in UNCTAD’s Inward FDI
Potential Index. It is also significant to note that
outward FDI is growing. In 2003 Chile took the
position of third in the Latin American/Caribbean
region, after the British Virgin Islands and the
Cayman Islands.
2.3 Brief History of Chile
12
When the first Spanish arrived in Chile, the Incas
were in control of the northern area and part of
central Chile. Warlike Araucanian tribes, who held
the Incas back, dominated much of the rest of
the country. The first Spanish settlements were
established in the mid-sixteenth century: Santiago
in 1541 and Concepcion in 1550. By the midseventeenth century the population of the Spanish
settlements numbered approximately 100,000.
This population grew to about half a million by the
mid-eighteenth century and to one million by 1830.
Europeans were concentrated in central Chile; few
settled in the northern and southern regions. This
pattern began to change only in the second half of
the nineteenth century, with the rapid growth of
mining activities.
Under Spanish colonial rule, northern and
central Chile were part of the Viceroyalty of Peru.
Independence was first declared in 1810. At that
time central Chile was mainly controlled by a small,
upper class of locally born European descendents.
Internal instability resulted in the restoration
of Spanish rule in 1814. Combined forces from
Argentina and Chile finally managed to defeat and
drive out the Spanish army and claim independence
10 11 12 Data on FDI is from United Nations, 2004.
see also Annex 3 for a summary of Chile’s political history.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
13
14
in 1818. In 1879-1883 Chile defeated Bolivia and
Peru in a war for the control of the Atacama Desert
and its rich nitrate deposits.
Mirroring political developments in Europe and
the United States, politics in Chile during the 19th
century was characterized by the conflict between
supporters of a parliamentary model and the
defenders of a strong presidential regime. The
parliamentary model tended to dominate until
1920. Three parties represented in Parliament the
interests of the land-holding oligarchy and the
different, newly emerging, urban classes. High
revenue obtained from taxing the export of raw
materials allowed the State to invest in physical
and social infrastructure early on and to become
relatively autonomous and insulated from oligarch
interests.
After a short spell of military rule, a new
Constitution came into force in 1925, establishing
a strong and typically Latin American presidential
system of government. In the early years of the
20th century, industrialization and the mining
industry, went hand in hand with important
changes in the social structure. An industrial
proletariat began to organize in unions and in the
cities, state employees, traders, intellectuals and
small businessmen forged a growing middle class.
New parties at the left of the political spectrum
emerged.
The world economic crises of the 1930s,
combined with dramatically reduced demand for
nitrates, Chile’s main export at the time, hit the
Chilean export industry very badly, causing high
unemployment and a decline in foreign exchange
earnings. This triggered a turning point in Chilean
politics, allowing left-wing parties to gain more
influence from 1930s onward. The left pressured
for political reforms and demanded economic and
political inclusion, but joined coalitions with both
left and right-wing groupings to back its three
consecutive presidencies. Until the 1950s the
additional left-wing party was seen as a stabilizing
factor within the Chilean political system, because
it encouraged compromise in a situation where no
political party could gain the presidency on its own.
During the period from 1930 to 1970 wider groups
of the population were enfranchised and electoral
reforms at the end of the 1950s/beginning of the
1960s cut back the control which large-estate
owners had exercised over the votes of agricultural
workers and also limited the possibility of vote
buying. Further institutional and policy changes
took place in the aftermath of the world economic
crises. Chile also changed its economic model
from one that exported raw materials, particularly
saltpeter and copper, to one that was more
domestically oriented. In 1939 a state development
agency (Corporación de Fomento de la Producción,
CORFO) was founded which was aimed at
building a domestic industry and creating new job
opportunities.
State interventionism and an increasingly
expanding state sector remained a central feature
of Chile’s economic policy until 1973, when it
culminated in the nationalization of the copper
mines and industries following the election victory
of left-wing party leader Salvador Allende in 1970.
Although the Allende Government proposed this
move, it was widely supported by other parties in
the Congress. Allende’s policy decisions triggered
a strong reaction from the right. Allende was
deposed and died in a military coup in September
1973. General Augusto Pinochet led a military
dictatorship for the next 16 years.
Under the military regime a neo-liberal economic
program was introduced, again reducing the
State’s role in the economy, liberalizing markets,
deregulating working relationships and transferring
market principles to the social sphere. The
restructuring did not work without the military’s
use of violence, particularly against the urban
poor. The economic situation improved from
1985 onwards and this is said to have caused the
middle class to turn its back on protest against
deteriorating social conditions. The military
Government lost a plebiscite on the continuation
of its leadership, which it called for in 1988.
This marked the beginning of the transition to
democracy. Free elections were called in 1989
and brought in as elected president the Christian
Democrat, Patricio Aylwin, who governed on the
basis of the Coalition of Parties for Democracy
(CPD). Eduardo Frei, another Christian Democrat,
succeeded Aylwin from 1994 to 2000. In 2000
Ricardo Lagos, a member of the Socialist Party (PS)
became president and has since led the coalition.
2.4 Chile’s Governance Structures
Chile has had a history of democratic rule for
nearly two centuries, interrupted only by a short
spell of authoritarian rule in the early 1920s and
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case
Studies
Phase
1 Report Summary
Findings and recommendations
the military Government of General Pinochet,
which lasted from 1973 to 1990. Since 1925 the
Chilean Constitution set out a presidential system
of government overseen by a bicameral legislature
consisting of a Chamber of Deputies and a Senate.
Chile shares with other Latin American presidential
systems the dominance of a strong executive with
considerable legislative powers.
Chile’s social structures have always underpinned
a multiple party system. With major social changes
taking place during the middle of the 20th century,
these have led to confrontational positions.
However, constitutional amendments and changes
to the electoral system undertaken in preparation
for the return to a civil and democratic government
in 1990 have set incentives that have produced
stable coalitions and policy practices that build
consensus and encourage collaboration.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
15
The Quantitative contributions of mining
to economic Growth and Poverty Reduction at
the national, Regional and local level
3
3. The Quantitative contributions of mining
to economic Growth and Poverty Reduction at
the national, Regional and local level
18
3.1 Overview
This chapter of the report addresses Stages 3
and 5 of the Toolkit as developed in Phase 1 of the
ICMM Resource Endowment initiative. It examines
the contributions of Chile’s mining activities with
respect to economic and social outcomes. The
chapter is structured as follows:
●
Section 3.2 explores the macroeconomic and social
contributions of the mining sector at the national level;
Section 3.3 summarizes the contributions of mining to
economic and social performance at the sub-national level,
focusing on Chile’s core mining region – Region II ;
Section 3.4 summarizes mining at the local level
Section 3.5 examines mining in Region II
Section 3.6 compares regional and national socio-economic
development trends.
Section 3.7 examines Escondida’s role in regional economic
development.
Section 3.8 provides a summary of this chapter.
●
Section 3.9 conclusions
●
●
●
●
●
●
Figure 3.1 North and Central Chile
Region II
Antofagasta
Escondida
3.2 Macroeconomic and Social Contributions of
the Mining Sector at the national level
3.2.1 Overview of Mining in Chile
Mining has always played an important role in
Chilean history and politics and, at times, has
determined the country’s destiny. The history of
mining in Chile, after nitrates lost their markets,
has largely been the history of copper.
The mining boom in the Atacama Desert began
when, in about 1860, a use was found for sodium
nitrate in the manufacture of smokeless powder in
explosives. After the Pacific War, with the region
under Chilean control, the industry was further
developed. During World War I exports at times
exceeded 3 million tons a year. When Germany
was cut off from nitrate shipments, however, an
atmospheric process was perfected for producing
synthetic nitrogen. The resulting collapse of the
market for nitrates after World War I depressed
Chile’s economy for more than ten years.
Following the nationalizations of foreign owned
mines in the early 1970s, the state owned company,
Codelco, dominated copper production. The
opening up to foreign mining investment initiated
by the Pinochet Regime resulted in few new
projects (the El Indio project was developed and
the mine Disputada de las Condes was bought by
Exxon) before the re-establishment of democracy.
The largest foreign investment project was the
one that is the subject of the present initiative,
Escondida, which began mine development in 1988.
Other investors followed in the 1990s and, with
the exception of Codelco’s mines and two mines
owned by the Luksic group (which are classified
as foreign owned), all large mines in Chile are
at present owned by foreign investors. Domestic
companies operate a large number of medium
size and small mines. During the period 19912003, total foreign mining investment in Chile was
13
US$15, 475 million . Chilean copper production
has been growing rapidly since the early 1990s,
with mine production increasing from 1.6 million
tons containing copper in 1990 to 5.4 million tons in
14
2004 . In the latter year, Chile accounted for 37% of
the world mine production of copper. A large portion
of the production, around 35%, is exported in the
form of concentrate, and consequently Chile’s share
of world production of refined copper is lower, at
26% of primary production in 2004. Its shares of
world exports in 2003 were 41% for concentrates,
35% for copper blister and anodes, and 36% for
refined metal.
Copper and its by-products such as molybdenum
and precious metals account for the major part
of mineral production by value, although other
minerals, including gold, iron ore and lithium,
contribute to total mining activity and revenues.
Downstream processing of metals is relatively
insignificant due to a limited local market and the
logistical constraints of entering the larger regional
market. For further details on the composition
and destinations of Chile’s mineral exports see
Annex 1.
del Pino et al, 2005, p. 241.
Figures on copper production and exports in 2004 and 2003 are from
International Copper Study Group, 2005, table 3.
13 14 The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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Phase
1 Report Summary
Findings and recommendations
3.2.2 Mining and Economic Performance since the
1950s
Between 1950 and 1973 the economic history of
Chile was essentially that of a liberal democracy
based upon a ‘structuralist’ view of the economic
world. Inflation was seen as an inevitable price for
economic progress and was tolerated. According
to the ‘structuralist’ school, orthodox monetary
solutions to inflation were of no use because of
economic rigidities, and its effects could only
15
be mitigated by institutional reform . Inflation,
which averaged over 48% per annum between
1950 and 1973, was simply tolerated. Thus, the
economic policy was characterized as requiring
detailed regulation and subsidies, exchange and
trade controls and administered internal prices.
There existed a four-sided social dialogue between
the trade unions, political parties, industry and
government.
Table 3.1 shows that apart from inflation (and even
that was consistent and far from hyper inflation),
the record of this system up to 1969 was not too
bad. However, fiscal deficits were growing rather
ominously. The period culminated in 1970 with the
election of the Allende Administration, which has
been described as “… an ideological melange of
structuralism, Marxism and a dash of Peroniststyle populism.” (Maddison, 2001, page 154) The
Allende Government held a different view on
economic policies and embarked upon nationalizing
private industry, including mines, and incorporate
these into the public sector.
Figure 3.2 shows that throughout the 1960’s
Chile’s exports were dominated by minerals.
The economy did suffer from real exchange rate
appreciation in a classic attack of ‘resource curse’.
The consequences were dealt with by protectionism
and all of the traditional, not necessarily effective,
policy responses to deal with the symptoms of
the problem, ranging from subsidies to increasing
16
tariffs .
This period ended in 1973, when a military coup
ended the short reign of President Salvador
Allende. Favoring free market economics, the
subsequent military Government was against the
economic policies and social order proposed by the
Allende Government and embarked upon a radically
different set of economic policies, which could be
seen as a precursor of what in the 1980s became
known as the ’Washington Consensus’.
One of the prime objectives of the economic model
of the authoritarian government was to reduce
government intervention in the economy. Thus 472
of the 507 state owned enterprises were sold off
and in the remaining public services, quasi markets
were introduced. The economy was opened up to
world trade with the explicit intention of promoting
the export sector. The State bureaucracy was
reduced and public employment fell by 30% in 10
years. The main fiscal objective was to reduce the
fiscal deficit. In 1972, the public budget was 20% of
GDP. By 1981 this had been reduced to 12%.
The first half of the 1970’s saw serious macro
imbalances, since during the Allende Government,
massive money creation and budget deficits had
reduced saving and investment to zero and ushered
in a period of hyperinflation. The situation required
a shock treatment, effectively reducing GDP by 12%
17
between 1970 and 1975 . Figure 3.2 shows that
the economy picked up again during the mid 1970s
until 1981. In the early 1980s the country saw a
severe recession, worse than either the regional or
income comparators. In retrospect, this was driven
by serious policy errors, namely the simultaneous
Table 3.1 Economic Indicators
GDP: annual Average
change
1950-59
3.6
1960-69
1970-79
Inflation: annual
average change
Current Account
Balance as % of GDP
Fiscal Surplus as %
GDP
36.6
-1.2
-1.6
4.8
24.3
-2.3
-5.6
2.0
131.9
-3.2
-3.7
1980-89
3.3
20.5
-7.1
0.0
1990-98
7.3
11.5
-3.6
1.7
Source: Aninat, 2000
16 15 Maddison, 2001
17 Stevens, 2005.
UNCTAD, 1987, table 6.2.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
19
use of the exchange rate to discipline inflationary
expectations with the opening of the capital account
prior to the stabilization of inflation. In the context
of a high copper price and a greatly increased
level of private sector overseas borrowing, this
resulted in an unsustainable appreciation of the
real exchange rate. Eventually, the copper price fell
and foreign confidence eroded forcing devaluation
in 1982. The banking sector was saddled with
unserviceable debts which required a government
bail out, leading to a brief return to public
ownership of assets. The whole episode can be
seen as an outbreak of Dutch Disease aggravated
by an erroneous policy response, but one that was
quite rapidly reversed.
Figure 3.2 Total GDP Growth
GDP ANNUAL GROWTH - Chile with Regional and Income
Comparators 1961 - 2003
CHILE
Latin America and Caribbean
Upper Middle Income
15
10
Percentage
5
-10
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
-15
Source: World Bank
When democracy was restored in the 1990s, Chile’s
economic success was largely the result of a boom
18
in agricultural exports . In the post 1973 period,
the military Government had pursued a deliberate
policy to encourage exports by radically reducing
the structure of protection that had been in place
for decades. This was a key to Chile’s economic
success. Whilst in 1970 Chile had exported US$33
million in agriculture, forestry and fishing products,
19
by 1991 this had risen to US$1.2 billion . The
liberalization of the domestic economy and Chile’s
international trade links lowered production
costs and thereby increased Chile’s international
competitiveness. Export oriented policies ended
the effective discrimination against agriculture
in the 1950’s and 1960’s when tariffs and other
import restrictions favored those economic
activities that produced importable goods, making
them domestically competitive at costs above
18 international prices . The reduction of import
tariffs also helped increase the competitiveness of
other sectors including the
mining sector, which helped set the conditions for
the mining investment boom of the 1990s. The
Pinochet Government also undertook efforts to
avoid exchange rate appreciation and reverse the
appreciation of the real exchange rate seen prior
to 1973, which had greatly inhibited agricultural
exports.
20
3.2.3 Economic Performance since the 1990s
Democracy was restored in 1989 and political
power was carefully transferred to an elected
civilian government in 1990. Continuity among
policy advisers and some institutional safeguards
have ensured that the macro and micro economic
policy orientation of the previous government
largely remained the same and have continued to
the present day. Exports and domestic production
of competitive goods have continued to increase
in a context where barriers to trade have been
dismantled.
0
-5
1961
20
Like its neighboring countries, Chile suffered a
recession in 1998 as a result of the fallout from the
Asian and Russian financial crises. The recession
was also aggravated by a severe drought in 1999,
which not only hit agricultural output but also
hydro-electricity supplies. The policy response was
a quick tightening of monetary policy to keep the
current account in check due to falling exports. In
light of its experiences with the crisis in the early
1980s, the Chilean Government introduced controls
on short-term capital flows to safeguard against
the risk of quick withdrawals of financial inflows.
Although at the time Chile received much criticism
for this policy response, in the aftermath it appears
to have been successful. Economic growth has
recovered in subsequent years. In 2003 GDP grew by
3.2% and, helped by higher copper prices, in 2004 it
grew by 5.8%. Between 1990 and 2003, Chilean GDP
grew at an annual average rate of 5.4% and by 2003
Chilean per capita GDP was $4,523 - the highest in
South America. Figure 3.3 demonstrates that the
Chilean economy outperformed both its regional
and income comparators.
US Library of Congress, 2004.
Figure 3.11 understates the role of agriculture in exports since it
measures only agricultural raw materials and therefore excludes processed
agricultural exports such a wine and non-traditional agricultural exports.
19 20 US Library of Congress, 2004.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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Figure 3.3 Growth of Non-Mineral GDP
NON-MINERAL GDP ANNUAL GROWTH - Chile 1971 - 2003
CHILE
Latin America and Caribbean
Upper Middle Income
40%
Annual % Growth
30%
20%
10%
0%
-10%
2001
1999
1997
1995
1993
1991
1987
1989
1983
1985
1981
1979
1977
1975
1973
1971
-20%
Source: World Bank
The data also shows that inflation has also been
brought under control. In large, this was the result
of giving the Central Bank independence in 1992.
However, the process to achieve this outcome was
far from painless. For example, the sharp increase
in real interest rates in 1998 in response to the
financial crisis caused Chilean SME’s considerable
21
hardship .
1970s, gold and silver production has increased
considerably although in the same period, exports
of lead and iron have fallen. As a result, the share
of mining in GDP has roughly remained constant
25
at around 8% between 1967 and 1992 . Since
then, volumes have increased but the value has
suffered from the vagaries of fluctuations in prices,
especially with respect to copper. In 2001, Mining
accounted for 8.4% of GDP.
In an effort to mute the impact of these fluctuations,
the Chilean Government introduced the Copper
Stabilization Fund in 1985. Whenever copper
prices have increased, a proportion of revenue from
Codelco has been set aside to be drawn upon when
the price of copper falls below its normal level’.
Table 3.2 Contributions to Fiscal Revenue from Codelco and
Enami
Year
An important aspect of Chile’s economic successes
lay in the fact that the economic reforms begun
in the 1970s effectively galvanized Chile’s
entrepreneurial classes to begin driving a process
of economic growth. Indeed, much of the growth
post 1973 was driven by Chilean capital helped
22
by the availability of domestic credit . Similarly,
years of inflation encouraged families to replace
conventional savings with investment in education.
Through the 1980’s and 1990’s Chile benefited from
23
an increasingly educated and skilled labor force .
This tradition has continued in recent years and
since 1990, government expenditure on education
has doubled, reversing the drastic cut in education
24
spending undertaken by the military Government .
Enami
Codelco
(Mill US$) (Mill US$)
Total
Fiscal
Revenue
(Mill US$)
Total
Contribution
(%)
1985
411
4
4,360
9.5
1986
455
14
4,718
9.9
1987
599
13
5,925
10.3
1988
1,467
7,013
21.3
1989
1,961
28
7,922
25.1
1990
1,505
6
7,619
19.8
11
8,494
10.4
1991
870
28
1992
891
9
10,338
8.7
1993
418
29
10,771
4.1
1994
858
22
12,137
7.2
1995
1,735
25
15,502
11.4
1996
1,044
16
16,513
6.4
1997
1,173
21
17,874
6.7
3.2.4 The Role of the Mineral Sector in Chile’s
Economic Performance
1998
355
15
16,735
2.2
1999
269
13
14,879
1.9
The role of mining in Chile’s economic achievement
is important. Up to the overthrow of the Allende
Government, minerals accounted for almost 90%
of Chilean merchandise exports of which copper
dominated. Its relative importance declined in the
1970s and 1980s, but by 1992 copper still remained
Chile’s most important product. Since the late
2000
702
1
16,274
4.3
2001
370
3
14,920
2.5
2002
326
1
14,182
2.3
2003
698
1
15,338
4.6
2004
3,009
2
20,486
14.7
21 22 23 24 ILO, 2003.
Schurman, 1996.
Hojman, 2002.
Bertelsmann Foundation, 2003.
Source: Comisión Chilena del Cobre (Cochilco), Anuario de Estadisticas
del Cobre y Otros Minerales 1985-2004, July 2005, www.cochilco.cl.
Banco Central de Chile, Indicadores Económicos y Sociales de Chile
1960-2000.
25 The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
21
The authorities determine on an annual basis the
‘normal’ level of the price. Until the mid 1990’s this
largely followed a ten-year moving average, but
26
more recently has been set lower . After 1987, the
resources available to the Fund grew substantially
and in 1998-99 there were substantial withdrawals
following a sharp downturn in copper prices.
Additions and withdrawals were large in proportion
to total government revenue in the 1980s, often
reaching 10% of such revenue. Since the mid-1990s,
however, they have been on the order of 2 to 3% of
total government revenues. The Fund has helped to
smooth out variations in fiscal income (which would
otherwise show large fluctuations due mainly to the
variability in tax payments by mining companies).
It is probable that the existence of the Fund has
made it easier for the Government to invest in long
range educational and other programs to improve
human capital. The overall counter cyclical effect of
Fund operations is less evident. The maximum size
of additions to, or withdrawals from, the Fund has
been about 1% of GDP, which may be significant.
However, it is probably too little to alone account
for the reduction in the standard deviation of annual
GDP growth from 7.3 and 7.0 in the 1970s and 1980s
respectively to 2.9 in the 1990s.
Figure 3.3 Minerals and Exports
Percent
Ores and metals in merchandise exports 1962-2003
100
90
80
70
60
50
40
30
20
10
0
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
22
Source: World Bank
FDI has been an important driver in the increasing
role of minerals and has flooded into the Chilean
mining sector since the early 1990’s. According to a
Chilean Government press release of 28th February
2005, total FDI amounted to $2.62 billion in 2003,
but increased sharply to $7.15 billion in 2004.
With the exception of the currency appreciation
and subsequent crisis in the early 1980s, there
appears to have been no long-lasting signs of
‘resource curse’ since the overthrow of Allende and
26 IMF, 2000.
the introduction of neo-liberal economic policies.
The most obvious evidence comes from Figure 3.3,
which shows that non-mineral traded GDP growth
has considerably outperformed Chile’s regional
and income comparators. Furthermore, as the
importance of mining in merchandise exports has
fallen, the risk of an attack of ‘resource curse’
correspondingly recedes. This is shown in
Figure 3.4.
The recent, very large increases in the price of
copper and the consequent rapidly rising export
income may, however, constitute a renewed
challenge for Chilean authorities to deal with
Dutch Disease. Reinvestment of profits by foreign
investors (presumably mainly mining companies)
was about 6% of GDP in 2004 and is expected to be
of the same order in 2005, compared to less than
1% in earlier years. Part of this increase may be
attributable to the impact of changes in taxation
and to companies having exhausted the possibilities
to use accelerated depreciation. It is probably
significant that, since 2002-2003, the nominal
exchange rate vis-à-vis the US dollar has risen
by close to 50%. This appreciation could hurt the
competitiveness of non-mining export sectors in the
long run.
Within the scope of this initiative it was somewhat
difficult to investigate in greater detail the
contributions of the mining sector to government
finances and the annual budget. Table 3.2 below
shows the tax and dividend payments made by
the state owned companies Codelco (Corporation
National de Cobre) and Enami (Empresa National
de Mineria) from 1985 to 2004.
There are no comprehensive data on total tax
payments made by private companies. However,
the Chilean Copper Commission (Cochilco) has
indicated that in 2004 the ten largest foreign mining
investors (who account for almost all private mining
production) paid US$ 1,008 million in taxes. During
the period from 1991 to 2003 they paid a total of
27
US$ 2,136 million . In comparison Codelco paid
US$ 3,009 million in 2004 (including dividends) and
US$ 9,709 million from 1991 to 2003.
Regarding the contributions that the mining sector
makes at the national level, we can draw the
following conclusions:
● Following the nationalization of the copper
industry in the early 1970s, the mining sector
27 del Piño et al. 2005, table 3, p. 240, and www.cocihlco
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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23
Table 3.2 Contributions to Fiscal Revenue from Codelco and Enami
Year
Codelco
(Mill US$)
1985
411
1986
Enami
(Mill US$)
Total Fiscal Revenue
(Mill US$)
Total Contribution
(%)
4
4,360
9.5
455
14
4,718
9.9
1987
599
13
5,925
10.3
1988
1,467
28
7,013
21.3
1989
1,961
28
7,922
25.1
1990
1,505
6
7,619
19.8
1991
870
11
8,494
10.4
1992
891
9
10,338
8.7
1993
418
29
10,771
4.1
1994
858
22
12,137
7.2
1995
1,735
25
15,502
11.4
1996
1,044
16
16,513
6.4
1997
1,173
21
17,874
6.7
1998
355
15
16,735
2.2
1999
269
13
14,879
1.9
2000
702
1
16,274
4.3
2001
370
3
14,920
2.5
2002
326
1
14,182
2.3
2003
698
1
15,338
4.6
2004
3,009
2
20,486
14.7
Source: Comisión Chilena del Cobre (Cochilco), Anuario de Estadisticas del Cobre y Otros Minerales 1985-2004, July 2005, www.cochilco.cl.
●
was dominated by state ownership until the late
1980s, even though, in principle, the sector had
been opened up for foreign direct investment
some years before, i.e. liberalization and an
attractive mining regime can take time to result
in increased mining activity. Foreign investment
has led to a rapidly growing sector since the early
1990s with mine production increasing more than
threefold over the period from 1990 to 2004.
Economic policies have shifted dramatically
with every regime change since the 1950s but
not following the political transition in the late
1980s. The military Government, which reigned
from 1973 until the late 1980s favored a market
economy that promoted the export sector and
reduced government intervention in the economy.
Macro imbalances inherited from before 1973 and
serious policy errors in the 1980s had a negative
effect on the country’s economic performance.
However, macroeconomic policy corrections and
complementary domestic reforms, including
●
●
agricultural reform, the promotion of domestic
ownership and the liberalization of trade links,
poised the country for a boost in international
competitiveness. This led to an impressive
increase in exports and domestic production since
the restoration of democracy in the late 1980s.
The importance of the mining sector has declined
in relative terms as other economic sectors have
grown. Foreign direct investment in the mining
sector has generally increased since the early
1990s, and has seen another sharp increase
in 2004. Although much of the industry is now
in private hands, two state-owned companies,
Codelco and Enami, remain important. Their
contributions accounted for nearly 6% of
government revenue over the ten-year period
from 1994 to 2004 and for more than 12.5% in the
period from 1985 to 1994.
Until 2004 the privately owned mining firms
that have established themselves in Chile over
the past fifteen years had not significantly
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Figure 3.5 Infant Mortality
INFANT MORTALITY
Chile with Regional and Income Comparisons 1960 - 2002
Latin America and Caribbean
Chile’s social performance shows a largely
positive picture. Since 1989 Chilean governments
have promised to “boost economic growth with
equity” (ILO 2003, p. 3) and to a large extent have
succeeded in doing so. The achievements of the
macro-economy are matched by improvements
in various social indicators. Figures 3.5, 3.6 and
3.7 show the trends for the three elements of the
Physical Quality of Life Index - infant mortality,
life expectancy, literacy rates. The Figures show
that Chile has outperformed both its regional and
income comparators. In terms of the Human
Development Index, Chile currently holds one of
the highest HDI ranking in Latin America and the
Caribbean (HDI 2002 = 0.839).
Further details on key social indicators are given in
Annex 2, which summarizes Chile’s progress on the
Millennium Development Goals. The Annex shows
that the most significant improvements have taken
place with respect to poverty and child mortality.
And in those areas where progress has been less
obvious, Chile had already started from relatively
high levels.
Upper Middle Income
Deaths per 1000 Live Births
100
80
60
40
20
2000
1995
1990
1985
1980
1975
1970
1965
1960
0
-20
Source: World Bank
Figure 3.6 Life Expectancy
LIFE EXPECTANCY
Chile with Regional and Income Comparisons 1960 - 2003
90
Latin America and Caribbean
Chile
Upper Middle Income
80
70
60
50
40
30
20
2000
1995
1990
1985
1980
1975
1960
1970
10
0
3.2.5 Chile’s Social Performance
Chile
120
1965
●
contributed to government coffers in direct ways,
principally because of low tax liabilities that are
typical early in the life of a mine and the rather
low copper price through the period 1992-2002
(the taxation conditions under which the mining
companies have operated have been common to
all foreign investment and were not particular to
mining). However, they are likely to have induced
a positive impact on tax collections, inter alia
through complementary industries and - although
less important - employees' income taxes. In
future years, direct tax payments are expected
to increase substantially as investments are
depreciated and companies begin to show taxable
profits.
Taxation of mining is likely to have been an
important factor behind Chile’s economic
success, since it has provided the Government
with substantial resources for investment in
human capital beyond what would otherwise
have been available. In addition, generally good
government policies have contributed to the
impressive successes that various economic
sectors have achieved, including those that
provide inputs to, and result from, the presence of
the mining industry.
Number of Years
24
Source: World Bank
Figure 3.7 Literacy
Community Services
Financial Services
Transportation,
Telecommunications
Commerce
Chile
Construction
Antofagasta
Public Services
Manufacturing
Industries
Mining
Agriculture, Fishing
-
200'000
400'000
600'000
800'000
Source: World Bank
Figures 3.5, 3.6 and 3.7 disguise that Chile’s social
performance has not always been positive over
the past couple of decades. During the era of the
military regime absolute poverty increased slightly
compared to the period before 1973 and income
distribution worsened significantly. In 1969 the
poorest 20% of the population accounted for 7.7% of
consumption spending, whilst by 1988 their share
of consumption had decreased to 4.4%, implying
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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a total decrease in average real income over the
period for this group by about 4%. For the same
time period the consumption share of the richest
20% of the population increased from 43.2% to
54.9%. Social expenditure as a percentage of GDP
and minimum wages had also decreased markedly
during the 1970s and 1980s.
Since the late 1980s, however, absolute and
relative poverty have been reduced drastically.
The proportion of poor people amongst the whole
population has nearly halved. In 1990, 38.6% of
Chile’s population was still considered to live
below the poverty line as defined by the World
28
29
Bank . This compares with 20.6% in 2000 . Only an
approximately 6% of the population is still suffering
from “extreme poverty”. In 1987 this figure had
30
stood at nearly 17% .
Table 3.3 Development of Poverty in Chile, 1987-1998
Year
Share of extremely
poor as % of total
population
Share of poor (including
extremely poor) as % of
total population
1987
16.8
44.6
1990
12.9
38.6
1992
8.8
32.6
1994
7.6
27.5
1996
5.8
23.2
1998
5.6
21.7
Source: Jaime Sperberg (2003)
With regard to income distribution the picture
remains somewhat more contradictory. Since
1987 the share of income that goes to the poorest
20% of the population has slightly declined and
government measures aimed at reducing unequal
income distribution have had little redistributing
effects. Chile’s income distribution remains among
the most unequal in Latin America (Gini-coefficient
from 1990-1996 approx. 0.47%) and is only topped
by Brazil. The new democratic government was
voted into power in 1989 with the expectation that
a new social policy would reduce inherited social
31
debts (deuda social) .
Aggregate positive results with respect to poverty
reduction somewhat disguise discrepancies
between urban and rural areas, as well as between
28 29 30 31 CIA, 2004.
Aninat, 2000.
Bertlesmann, 2003 and Sperberg, 2003
Sperberg, J., 2003 page 31.
regions. In 1998 poor people made up 20.7% of the
urban population, but 27.6% in rural areas. The
proportion of poor people in Region IX, where most
of Chile’ s indigenous minority lives, was more than
34%. Poverty levels are highest in this Region and
in Region VIII, both of which exhibited the highest
rates of growth in the export industry (wood).
With 15.4%, poverty is lowest in the region of
Metropolitana to which Santiago belongs (Instituto
Nacional de Estadísticas).
In summary, given that the proportion of Chileans
living in poverty has halved since the late 1980s,
the country’s aggregate social achievements
have been impressive. Although some differences
remain between regions and between urban
and rural areas, macroeconomic achievements
and entrepreneurial activities serving the export
markets have clearly brought higher living
standards to many Chileans. A recent ILO study
points out that the impressive reduction in poverty
has been brought about not by redistributive
measures but by a rise in formal employment, and
thus a declining unemployment rate. Where social
disadvantages persist, it is expected that social
32
policies will redress these .
3.3 The Contributions of Mining to Economic
and Social Performance at the Sub-National level
Constraints in the scope of this case study
have not allowed a detailed assessment of the
contributions of the mining sector to economic
and social performance at the sub-national level.
However, in contrast to other mining countries
reviewed for the Resource Endowment initiative it
would appear that Chile does not operate a public
finance system that earmarks revenue generated
by mining for redistribution back to mining regions
and mining communities. (The country is divided
into 13 regions, most of which do not host mining
activities). In regions where mining is not the only
economic activity it would be difficult to single out
the impact of mining from that of other economic
sectors.
An added complication is that - as pointed out in the
previous Sub-Section – taxes paid to the national
Government by private mining companies have not
yet amounted to very significant amounts, although
they increased sharply following the copper price
increase in 2004 and are likely to remain high in
the future. However, the considerable contributions
32 ILO, 2003
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
25
26
to the government budget made by Codelco are
likely to have had the effect of loosening what could
otherwise have been tight financial constraints
on the Government and have probably permitted
higher spending, particularly on investment in
human capital than would otherwise have been the
case.
and that this trend is reflected in all regions.
The Table also shows that the mining region of
Antofagasta (Region II) depicts a particularly
impressive improvement in poverty reduction. This
achievement is further discussed in Section 3.6
below, comparing Region II with national averages
and other regions.
This suggests that a detailed comparative analysis
of the mining sector’s tax contributions at the
regional level may not provide particularly useful
insights. More importantly, it also suggests that the
positive impact that mining activities have had on
the Chilean economy and its social achievements
are less the result of regional redistribution than to
the channeling of mining tax revenue into general
development expenditure by the Government, as
well as synergetic and complementary effects
between different economic sectors and how
they have been facilitated by public institutions
and policies. In summary, the most important
contributions of the mining industry to economic
and social development at the regional level may
arise through the inducement of complementary
economic activities that provide inputs and result
from the presence of the mining industry.
Table 3.4 below shows regional achievements
in poverty reduction and remaining differences
in poverty levels. As pointed out before it is
indeed very striking that since 1990 the number
of Chileans living in poverty has nearly halved
3.4 Mining at the Local Level
This section of the report draws largely on Stage
5 of the Toolkit and assesses the impact of the
Escondida mining operation, which is located in
Chile’s Region II, also referred to as the region of
Antofagasta. The section explores to what extent
there is a link between mining in this region and
economic growth and poverty reduction.
3.4.1 Region II and its Economy
Region II, where the Escondida mine is located, now
has a population of 498,000 people. It has grown
by almost a quarter since 1990 and much of the
increase is attributed to the increase in mining
activity. The influx of people into Region II is most
noticeable in Antofagasta, the region’s capital,
where the population has increased from 223,600 to
273,300 people. Other municipalities, however, have
also benefited from the growth in mining activity.
Nearly 98% of the population live in urban areas,
largely due to Region II being one of the driest areas
Table 3.4 Population living in a situation of poverty, by region, 1990-2003 (in thousand and percentage of population)
Region
No.
1990
%
1994
%
1996
%
1998
%
2000
%
2003
%
Tarapacá
I
91
28
79
22
78
22
60
16
81
21
75
19
Antofagasta
II
134
34
110
26
72
17
58
13
63
14
53
11
Atacama
III
74
34
76
32
65
27
73
29
63
24
67
24
Coquimbo
IV
219
46
171
32
162
31
138
25
142
25
128
22
Valparaíso
V
578
43
387
27
326
22
283
19
295
19
306
19
Del Libertador
VI
275
41
243
33
195
27
172
23
160
21
153
19
Del Maule
VII
345
43
343
40
281
33
259
29
228
25
213
23
Del Biobío
VIII
813
48
721
40
620
34
605
32
518
27
550
28
De La Araucanía
IX
336
45
265
34
296
36
284
34
276
33
253
29
De Los Lagos
X
368
40
319
32
321
32
298
29
256
25
231
22
De Aysén
XI
23
31
23
28
18
22
13
15
13
14
13
14
De Magallanes
XII
40
30
21
14
19
13
17
12
16
11
18
12
Santiago Metrop.
XIII
1,670
33
1,080
20
837
14
902
15
972
16
847
14
4,966
39
3,837
28
3,288
23
3,160
22
3,081
21
2,908
19
Totals
Source: Encuesta CASEN, MIDEPLAN
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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on Earth. Nothing grows without irrigation and the
region’s remoteness from other major population
centers offers great obstacles to the differentiation
of economic activities. The economy of Region II is
almost completely dominated by mining.
As a result of the rapid expansion of mining, the
region has experienced high economic growth since
the early 1990s. In 2003, Region II had a GDP per
capita of US$11,996, more than twice the per capita
GDP of the country (US$5,216). The rate of growth
in GDP per capita has also been significantly higher
in Region II than in the country as a whole. Table
3.5 shows the distribution of employment among
sectors nationally and in Region II.
33
Table 3.5 Sectoral distribution of employment, Region II and
Chile, 1st Quarter 2005, % of total
Sector
Agriculture and others
Chile
Region II
13.6
2.5
1.3
12.0
13.2
7.6
Energy, utilities
0.6
0.8
Construction
8.3
18.1
19.1
18.7
Transport and communication
8.4
8.2
Financial services
8.5
6.4
Personal services
27.1
25.7
Mining
Industry
Commerce
Source: Instituto Nacional de Estadísticas
Mining accounts for 12% of employment in
Region II, compared to 1.3% in Chile as a whole.
Construction is also over-represented in the region,
while the proportion employed in agriculture
and industry is lower than the national average.
Unemployment has been very variable, due to
variations in mining investment. During the years
1992-1999, unemployment was lower than the
national average, mainly because of the boost
to employment provided during the times when
the mining industry was expanding. In the first
quarter of 2005, unemployment stood at 8.8%,
higher than the national figure of 7.9%, but lower
than the other two northernmost regions (Instituto
Nacional de Estadística). Employment has grown
at a slightly higher rate than total population, or by
2.1% per year during the period 1990-2001. This
rate was slightly higher than the national average,
which was 1.75% per year. While the improved
employment opportunities and incomes resulting
from mining are appreciated, the mining based
expansion is seen as carrying with it certain risks
and disadvantages, at least by some sectors of the
population.
Although more than seventy years have passed, the
crash of the region’s nitrate industry is frequently
cited and there are fears that the copper mining
boom will prove equally transitory.
Income differences between those who work in
the mining companies and related activities and
the rest of the working population are significant.
Figure 3.8 and Tables 3.6 and 3.7 show data from
the year 2000, which appear to illustrate both that
income differences between sectors were larger in
Region II than in Chile as a whole and that mining
and the sectors associated with it had wages higher
than the national average, while other sectors,
particularly services, had wage levels considerably
lower than the national average. It is also argued
that demand from mining company employees
contributes to high local prices, particularly
of housing. While there is no local price index
available, a comparison of prices of household
goods, including basic foods, in different regions,
published by the National Statistical Institute,
appears to confirm that prices are indeed higher
in Antofagasta than in other regions (see www.ine.
cl). A housing cost index published by Universidad
del Desarrollo (2004) shows indeed that the city
of Antofagasta was the urban area with the third
highest housing costs in the country, after Santiago
and the southern city of Coyhaique.
Figure 3.8 Average income by economic activity, OctoberDecember 2000, Chile and Antofagasta, in Chilean pesos
Community Services
Financial Services
Transportation,
Telecommunications
Commerce
Chile
Construction
Antofagasta
Public Services
Manufacturing
Industries
Mining
Agriculture, Fishing
Region II accounted for 18% of all foreign investment under decree
number 600 (the 1974 decree under which almost all direct foreign
investment takes place) from 1990 to 2001 and for 39% of foreign investment
in mining.
33 -
200'000
400'000
600'000
800'000
Source : Income Survey. National Statistical Institute
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
27
28
Table 3.6 Average income by economic activity in Chile: October-December 2000, Chilean pesos
Men
Women
Total
Total
304’181
209’081
271’393
Agriculture, Fishing
155’064
124’484
151’532
Mining
581’844
341’533
564’641
Manufacturing Industries
266’985
168’092
239’563
Public Services
641’236
437’707
603’647
Construction
231’443
517’809
238’028
Commerce
294’195
174’523
239’185
Transportation, Telecommunications
318’911
239’595
307’398
Financial Services
735’186
318’164
579’084
Community Services
312’571
218’607
259’612
Source: Income Survey. National Statistical Institute
Table 3.7 Average income by economic activity in Antofagasta: October-December 2000, Chilean pesos
Men
Women
Total
Total
357’381
230’974
381’912
Agriculture, Fishing
214’922
203’519
Mining
690’905
Manufacturing Industries
287’398
Public Services
460’790
437’456
Construction
284’056
288’897
Commerce
276’487
182’821
225’816
Transportation, Telecommunications
286’568
236’254
279’602
Financial Services
370’611
258’865
331’888
Community Services
351’388
239’678
294’923
The housing costs appear to be a major contributing
factor to the high frequency of commuting in Region
II. Figure 3.9 shows the relationship between
housing cost and the net commuting rate by
region. In Region II, net commuting into the region
corresponds to 10% of the labor force, a very high
figure.
Despite the impressive reduction in poverty in the
region over the past 15 years it is widely perceived
that little of what the mining companies pay in taxes
is returned to the region in the form of social and
physical infrastructure. For this reason there is
strong support for the new ‘special tax’ on mining
companies, of which 15% of the proceeds will be
returned to local development in the host regions.
Region II received almost 52 billion pesos (about
US$97 million at current exchange rates), or 3.9%
682’259
279’316
258’860
of total public investment in 2003, slightly more
than its share of the population (Corporación para
el Desarrollo Productivo: Inversión Pública Efectiva,
Región de Antofagasta 2003). As Figure 3.10 shows,
the region’s share has declined slightly over the
past few years, mainly because centrally decided
investment has declined while investment decided
by regional offices of the relevant authorities has
increased. Within the scope of this initiative, it has
unfortunately not been possible to establish the
total amount of taxes paid by mining companies in
Region II (mainly because Codelco has activities in
several different regions of Chile, although the bulk
of its production is in Region II). However, Minera
Escondida alone paid more than this amount
in taxes on profit and dividends to the central
Government. The largest share of taxes on mining
is paid by Codelco and this is considerably more
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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than the public investment figure just mentioned.
Finally, it is also felt that the contribution of mining
companies to the region’s economy is unnecessarily
reduced by the fact that many of their employees
have permanent residence outside the region and
spend little money locally.
lithium minerals and nitrates are also produced
(see Table 3.8). As new mines have opened, and
existing ones have expanded capacity, production
has grown. Several new projects are under-way
at present, including one (Spence) owned by BHP
Billiton, Escondida’s main owner.
Figure 3.9 Housing Cost and Net Commuting: Chile 2002
There are also a large number of small mines,
mainly mining copper and estimated by Servicio
Nacional de Geología y Minería (Sernageomin),
the regional mines and geology agency, to
number about 160. The small miners are joining
together to build a processing plant with mills,
concentrator and an SX/EW plant to produce 2000
tons of copper per year. The plant was donated
by Escondida, which has also provided technical
assistance. The new plant, which will process 90%
of the present output of the members of the Small
Miners’ Association, will lead to higher incomes
for members through higher recovery and lower
transport costs.
Housing Cost and Net Commuting: Chile 2002
0.1200
II
Net Commuting Rate
0.1000
0.0800
XI
0.0600
0.0400
XII
0.0200
0.0000
-0.0200
III
50.0
RM
60.0
VI
VII 70.0 VIII IX80.0
IV
V
-0.0400
90.0
100.0
I
X
110.0
120.0
Housing Cost Index
Source: Patricio Aroca, Universidad Católica del Norte, elaboration based
on census data.
Figure 3.10 Region II’s share of total public investment, 19982003, per cent
Table 3.8 Mineral production in Region II, 1994, 1999 and 2003,
thousand tons unless otherwise indicated
Year
1994
1999
2003
Metals*
5
Copper
4
Molybdenum
3
Gold, tons
Silver, tons
2
1
0
1255.0
2410.8
2606.9
11.0
14.2
16.4
9.4
8.7
17.1
334.3
372.0
496.7
Industrial Minerals
1998
1999
2000
2001
2002
2003
Source: Corporación para el Desarrollo Productivo: Inversión Pública
Efectiva, Región de Antofagasta 2003
Apatite
6.7
9.3
6.6
Calcium Carbonate
674.8
856.1
949.7
Lithium Carbonate
10.4
30.2
41.7
-
0.2
0.0
Quartz
166.3
216.9
131.0
Nitrates
822.4
916.2
1133.9
Pozzolan
79.4
80.8
81.9
Sodium Sulphate
42.7
58.0
44.0
Ulexite
25.8
26.3
37.5
Gypsum
10.2
8.3
11.6
Iodine
3.6
5.2
8.2
Lithium Chloride
3.5 Mining in Region II
For a long time Codelco’s Chuquicamata Mine,
which has been in operation since 1910, was the
only large copper mine in Region II. In the late
1980s, the Escondida Mine became the first foreign
owned mine in the region. Several others followed
during the 1990s and early 2000s.
Now in 2006 there are a number of large mines in
operation. The most important ones are depicted
in Table 3.9. Copper is the main value mineral.
Significant quantities of gold, molybdenum, silver,
*Metal content
Source : Servicio Nacional de Geología y Minería (Sernageomin)
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
29
Table 3.9 Large Mines in Region II
Mine
Owners
Start-up
Production 2004,
thousand tons copper
Codelco
Government
1910
983
Escondida
BHP Billiton, Rio Tinto, Japanese Escondida
Consortium, International Finance Corporation
1991
1,195
Mantos Blancos
Anglo American
1954
155
Zaldivar
Placer Dome
1995
147
Michilla
Antofagasta Minerals (74.18 %)
1994
50
El Abra
Phelps Dodge (51 %), Codelco (49 %)
1996
218
Lomas Bayas
Falconbridge
1998
62
Sources: Cochilco and Escondida, personal communications.
Construction commenced in 1988 and by late 1990
the first ore was processed in the concentrator
plant. The initial design production capacity was
320kt of copper/year, built at a cost of $836m.
Subsequently, the mine has undergone four
expansions which increased the concentrate plant’s
capacity from 35kt/day to 230kt/day. In addition to
this rapid increase in the processing capacity of
the concentrate plant, investment has also been
made in extending the original cathode production
capacity from 80kt/year to 150kt/year. Figure 3.11
shows the development of production.
Since its inception, Escondida has undergone an
almost continuous expansion. Figure 3.12 shows
the investment made (in current US$) over the life
of the operation, totaling US$4.2 billion.
1,500
1,250
1,000
750
500
250
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
1992
Escondida is located in the Atacama Desert, 170
km to the southeast of Antofagasta. The orebody
was discovered in 1981 by a joint venture between
Minera Utah de Chile and Getty Mining (Chile).
Subsequent transactions resulted in a change
of ownership to BHP Billiton – the majority
shareholder and manager of the mine - Rio Tinto,
Japan Escondida Company and the International
Finance Corporation. The decision to exploit the
orebody was of some historical significance as it
constituted the first post-Allende investment by
foreign companies in the mining sector. It was (and
is) also the biggest foreign mining investment.
Seen as a risky move at the time, it represented
an expression of faith in the new investmentfriendly mining regime introduced by the Pinochet
Government. It is of significance that the IFC was
asked to purchase a share of the equity.
Figure 3.11 Copper production at Escondida, thousand tons,
1990 - 2004
1991
3.5.1 The Escondida mine
1990
30
Source: Escondida
Figure 3.12 Direct Investment in Escondida, 1991-2004 (in US$
million)
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Up to 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total
1991
Source: Escondida
The mine is still undergoing a process of expansion,
which will end with the start of production at the
new Escondida del Norte open-pit later this year.
In excess of US$4 billion have been invested in
Escondida since 1988. Total production of copper
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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Case
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1 Report Summary
Findings and recommendations
was 995kt in 2003 (847kt copper-in-concentrate
and 148kt copper cathodes) and 1,195 kt in 2004.
The main byproducts are gold and silver, neither
of which, however, account for a major portion of
turnover or profits.
Table 3.10 Byproducts in Escondida
2003
2004
Gold
Kilograms
5’733
6’764
Silver
Kilograms
147’051
178’756
Source: Minera Escondida
3.5.2 Current Activities
The mine consists of a single pit nearly 2.5km in
width and breadth. Both oxide and sulphide ores
are mined, the former with a grade of approx.
1.42%, the latter with a grade of 0.76%. The oxide
ore is crushed and then leached near the mine
site using sulphuric acid and the resulting copperrich solution is electrolyzed in order to produce
copper cathodes. The cathodes are transported
by rail to Antofagasta for export. The sulphide
ore is crushed and ground to a fine powder,
which is concentrated using conventional flotation
techniques. The concentrate is then pumped
along a pipeline to a terminal at Coloso (near to
Antofagasta) whence it is shipped to smelters in
North America, Europe and Asia. 8.5% of output is
sold to customers in Chile.
In order to sustain the high level of production
a range of infrastructure, supplies and services
are required. Escondida requires up to 320MW of
power, which is provided by two private powergenerating companies, one of which is located
across the border in Argentina. The mine used
about 64 million cubic meters of water in 2004, of
which 23 million were recycled, principally for the
processing and transport of concentrate. The water
is obtained from a 170 km pipeline that accesses
aquifers in the Andean mountains. Water use is
minimized by de-watering of the concentrate slurry
at Coloso. In response to the need for further
supplies of water, a seawater desalination plant
has been constructed at Coloso at a cost of US$159
million and capable of delivering 500 l/sec.
flotation-based concentration for the sulphide
ore and solvent-extraction with electrowinning
for the oxide ore. One aspect of new technology
relates to the Sulphide Leach Project which aims
to utilize the currently sub-economic run-of-mine
ore. This material has an average grade of 0.52%,
for which crushing, grinding and flotation cannot
be economically justified. However, advances
in bacterial leaching allow for the recovery of
much of this metal. Leachate from this source
will substitute for the gradually declining oxide
leachate.
The Coarse Particle Recovery Project is another
technical innovation that promises to utilize
old tailings to deliver 50kt/year of copper-inconcentrate.
3.5.4 Projected Mine Life
At the end of 2003, Escondida had proven and
probable reserves of 19.4mt of recoverable copper,
estimated at a price of 82c/lb and equivalent to
about 16 years of production at current rates. In
addition, there were mineral resources, estimated
with varying degrees of confidence, which imply
about 81mt of copper capable of sustaining
production rates for a further 67 years.
3.5.5 Employment and Dependants
Direct Employment
Minera Escondida accounted for 2810 direct
employees in 2004, an increase of 13% on the
2486 employed in 2003. This increase reflected the
expansion of production at the mine. Over 99% of
employees were employed at the mine site and port
facilities.
Indirect Employment
Employment of permanent contractors at the
existing Minera Escondida operations totaled 2,345
in 2004; this is an increase of 4% on the 2,257
employed in 2003. In addition, 2938 temporary
contractors were employed on the expansion
projects (up from 1103 in 2003).
3.5.3 Production Technology
Employees engaged in social investment and
provision
The technology used to extract and process the
ore is standard to the mining industry, namely
Minera Escondida directly employed twenty-one
full-time equivalents on social investment projects.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
31
The Foundation Minera Escondida was established
in 1996 to support capacity building in education,
health, local business and community development.
It employs 9 full-time equivalents.
Induced Employment
The multiplier given in the Toolkit applied to the
totaled employment figures above gives an induced
employment range of between 8,505 and 12,887,
between 5 and 6.7% of all occupied persons in
Region II.
The Catholic University of Antofagasta (Patricio
Aroca-Gonzalez) in 1999 made an estimate of
Escondida’s secondary employment, which includes
all employment in Region II created by the spending
of both the mine and its employees. Depending on
the degree to which spending by mine employees is
divided between goods and services produced within
or outside of Region II, the employment multiplier
could vary between 3.1 and 5.7. Evidence from a
purchasing survey indicated a likely value of 4.2.
The resulting figures, with temporary employment
resulting from the expansion phases also included,
for the period 1988-2004 are seen in Figure 3.13. In
2004 the estimated induced employment amounted
to 9,495 people.
Figure 3.13 Direct, indirect and induced employment of
Escondida
20'000
15'000
10'000
5'000
Employment due to Investment
Induced
Indirect Operations (Contractors)
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0
1988
32
Escondida
Source: Escondida
Local versus National Employment
There are 2165 employees (77% of the total) living
in Region II (mainly in Antofagasta) and 635 living
in other parts of Chile. The mine is situated in the
desert and there is virtually no community located
close to the mine. The closest large settlement
is Antofagasta which, although 170km distant,
represents the ‘local’ community. Employees at the
mine site work a four-day shift and the company
at the minesite provides accommodation for this
period.
Social Distribution of Employment
11 employees are expatriate and 2,799 employees
(99 % of the total) are Chilean nationals. 104
employees are female (3.7% of the total).
Dependants
There are 8,183 dependants of Escondida
employees, which implies a dependency multiplier
34
of 2.9 . If the same multiplier is applied to the
induced (including indirect) employment created by
the mine, then the total number of dependants can
be estimated as nearly 35,700. It is likely that the
dependency multiplier for Escondida employees is
lower than for others whose employment is created
by the mine.
3.5.6 Human Capital Development for Employees
Investment in training of Escondida’s employees
has increased steadily, both in terms of total
expenditure and in time spent on training per
employee. Expenditure on training per employee
was US$1,912 in 2004, up by 4 % from 2003, while
the number of man hours spent on training were
305,000; 21% more than in the previous year. A
possibly more informative indicator is the number
of man hours spent on training as a portion of
total man hours worked. This proportion rose
continuously from 3.9% in 2001 to 5.3% in 2004.
Training focuses on technical competencies,
with 40% of total training time spent on technical
capacity development and an additional 30% on
technical specialization. These training programs
are mainly long-term, over about four years, and
are intended to ensure that employees’ skills are
commensurate with the demands placed upon
them. The remaining 30% are devoted to health
and safety, management courses, languages and
computer software.
Escondida reimburses employees pursuing
advanced studies for part of the costs incurred.
The CEIM (Centro de Entrenamiento Industrial
y Minero, the Industrial and Mining Training
This figure is an overestimate as the figure for dependants includes
employee spouses, some of whom are themselves employed.
34 The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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Phase
1 Report Summary
Findings and recommendations
A high proportion of procurement requirements,
or 80%, are met from within Chile, and almost
half from Region II. A portion of the domestic
procurement is, however, likely to consist of
imported goods bought from local agents. In 2004,
a year in which there was high spending on capital
goods (which are more likely to be imported),
procurement spending was distributed as shown in
Table 3.11.
Table 3.11 Geographic origins of Escondida procurement
Million of US$
Region II Antofagasta
229,797
Rest of the country
162,901
Imports
Total
shareholders
500
400
300
200
100
2003
2001
1999
1997
1995
1993
1991
0
Source: Escondida
3.5.9 Contribution to The Host Economy
3.5.7 Value of Procurement
Origins
33
Figure 3.14 Income taxes paid by Escondida and its
Million US$
Centre), founded in 1999, belongs to the Escondida
Educational Foundation and it is a non-profit
organization whose main mission is to foster
excellence in the mining industry. The Centre has
developed several programs on specific subject
to improve employment opportunities for local
workers within Region II. CEIM has an alliance
with the British Columbia Technological Institute
of Vancouver, Canada, which allows the Center to
manage, develop and certified labor skills programs
under the International Certification CEIM – BCTI.
The Center has been reinforced through an alliance
between Escondida and 20 other companies. It will
graduate 350 technicians in electronics, electrical
engineering, heavy machinery and industrial
machinery every year, beginning in December 2006.
90,429
483,127
Source: Escondida
3.5.8 Taxes and Payments to Public Authorities
Company income and dividend taxes amounted
to $423 million in 2004 and $120 million in 2003.
Figure 3.14 shows the split between company
income tax (15 to 17.5% in yellow) and dividend tax
(17.5 to 20% in red) and the evolution of these tax
payments since 1991. Employees’ income tax and
social contributions amounted to US$16.2 million in
2003 and US$20.6 million in 2004.
The value added by Escondida amounted to $1.2
billion in 2003 and $2.7 billion in 2004. It was
distributed between different parties as indicated in
Table 3.12.
Table 3.12 Distribution of value added by Escondida, in US$
Recipient
2003
2004
Employees
106,681,925
146,430,872
Contractors
131,886,519
164,405,966
State of Chile
110,634,727
476,272,899
Shareholders
0
333,174,750
11,780,256
12,544,248
774,753,000
1,463,948,000
74,946,290
65,623,617
1,210,682,717
2,662,400,352
Community
Reinvestment
Financial
Suppliers
Total Value
Added
Source: Escondida
The value added by Escondida made a significant
contribution to the wealth of Chile, accounting for
1.7% of GDP in 2003 and over 3.5% in 2004. Region
II accounted for 7.1% of Chilean GDP in 2003, so
Escondida accounted for 24% of the value added in
Region II.
Most of this value was retained in the Chilean
economy. On the assumption that in 2004 the
payments to shareholders were repatriated and
that 40% of the value of the sum reinvested in the
company was paid to foreign suppliers we are left
with a retained value added figure of $1744 million
or about 2.4% of GDP.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
34
Table 3.13 Escondida’s exports, thousand US$
Total Sales
2003
2004
1’938.9
3’660.2
Exports by destination (FOB)
Europe
390.0
941.1
Germany
144.3
251.6
Spain
53.0
132.8
France
37.6
86.0
Italy
26.5
12.3
Netherlands
9.7
103.0
United Kingdom
6.6
24.1
Sweden
58.0
103.6
Others
54.3
227.7
America
92.9
248.5
Brazil
75.4
120.4
Canada
10.1
12.7
United States
5.3
23.6
Mexico
2.1
4.4
Others
0.0
87.4
1’046.6
1’728.1
Republic of Korea
187.1
342.4
China
192.6
269.0
India
112.3
199.6
Japan
467.9
818.5
Taiwan province of China
26.3
73.4
Others
60.4
25.2
Other Destinations
29.3
0.0
1’558.8
2’917.7
80.4%
79.7%
Asia
Total Exports
Exports / Total Sales
Source: Escondida
3.5.10The Opportunity Cost of Economic Resources
Labor
Anecdotal information indicated that wages in the
mining sector in Region II are about 30% above the
wages in the non-mining sector in Region II (the
difference is actually larger, see Tables 3.6 and
3.7). As a first approximation, the opportunity cost
of employing labor at Escondida can be taken as
70% of the total remuneration, although the skills
of the two labor pools are somewhat different.
Escondida makes up a significant part (14.2%) of
the total Region II mining sector. If it were to close,
it is unrealistic to believe that more than a small
proportion of those retrenched would find new
employment at even 70% of the current Escondida
average wage level. Effectively, the opportunity cost
of labor is therefore lower than the 70% figure. Of
course, if the mining industry as a whole were to
close, the opportunity cost of labor in Region II
would be far lower still.
Land
Escondida exists in a desert area where the
opportunity cost of land is effectively zero.
Capital
Some of the capital required for Escondida was
raised in local markets. If the return on this capital
is similar on a risk-adjusted basis to return it would
generate elsewhere in the Chilean economy, the
opportunity cost will equate to the actual cost.
3.5.11 Contributions to Exports
Of a total sales value of US$3,660 million in 2004,
US$2,917 million (80%) was exported. A similar
proportion was exported in 2003. Direct imports in
2003 were US$ 60.55 million, in 2004 US$ 76.26
million, mainly from US.
3.5.12 Physical Infrastructure
Escondida needed to invest in various forms of
infrastructure to ensure the provision of services to
its operations. Power and water supply have been
sourced from distant locations. These could, in
principle, also be made available to other users, but
the benefits are limited because of the absence of
settlements in the Atacama Desert. Nevertheless,
the investment required to meet the increased
demands of the Region II mining industry has been
credited with reducing the cost of power to the
public in general. Figure 3.15 shows the increase in
generating capacity over the period of Escondida’s
operation and the decline in the electricity tariff. On
closure of the mine, the concentrate slurry pipeline
(which extends to Coloso) could be converted to
transport water thereby increasing the availability
of water to Antofagasta. A considerable road
construction program was required and completed
at a capital cost of $8.5m by 1990. These roads are
maintained at an annual cost of $850k (in 2004) and
are open for public use.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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Figure 3.15 Generating Capacity, Copper Production and
Power Prices in Region II, 1993-2002
4.000
45,0
3.500
40,0
3.000
35,0
25,0
2.000
20,0
1.500
mils/kWh
30,0
2.500
MW
●
15,0
1.000
10,0
Capacidad MW
Producción de Cu I y II Región en Miles de Ton
2002
2001
2000
1999
1998
1997
1996
1995
0,0
1994
5,0
0
1993
500
CMg mils/kWh
3.6.1 Some Socio-Economic Indicators and Trends
for Region II, Compared with Other Regions and
National Averages
Source : Minera Escondida
3.5.13Other Social Contributions
A foundation established by Escondida, the
Fondacion Minera Escondida (FME), carries out a
wide range of social programs. It received US$15
million from Minera Escondida in 2000, which was
intended to finance a five year program.
FME paid $759,000 to support educational
programs in 2004. It paid $442,000 to support
health provision, mainly to reinforce the existing
health system, and $132,000 to develop local
enterprise in 2004, mainly on training programs.
Finally, FME paid $852,000 to community
development in 2004, mainly for capacity building in
existing social organizations and especially to assist
indigenous people.
3.6 Comparing Regional And National SocioEconomic Development Trends
This Sub-Section compares the socio-economic
trends and indicators of Region II with the rest of
Chile and tries to shed some light on the effect
that mining may have had on living standards
and the quality of life in this region. However, for
the following reasons we caution that the results
presented here have to be interpreted very carefully.
●
Second, while the Escondida mine is the subject
of the local level assessment of mining of the
present study it is not the only large mine in
Region II. Chuquicamata has been in operation
for almost a century and several other large
mines have opened during the past ten years.
Nevertheless, by virtue of its size and also
because of its more focused efforts to contribute
to regional economic development, it is not
altogether unfair to attribute a large part of socioeconomic change - both positive and negative
- in Region II to the existence and activities of
Escondida.
First, we know very little about how Region II
would have looked without mining, particularly
since mining has been the dominant economic
activity for the past 150 years and has thus
shaped both the economic and social landscape.
It is likely that the socio-economic impact of
mining has changed over this period of time, but
past impacts underlie the present economic and
social reality.
Over the past decade and a half, Region II has
experienced more rapid economic growth than
most other regions in Chile. Average annual GDP
growth 1988-2000 was 8.6% in Region II and 6.7% in
Chile as a whole. In 2003, Region II had the highest
GDP per capita in the country, at US$ 11,996 (www.
ine.cl), more than twice the per capita GDP of the
country (US$ 5,648, see Figure 3.16).
Figure 3.16 GDP per capita, 1992 and 2003, in US$ current
14.000
11.996
12.000
10.000
8.000
4.000
5.648
5.216
6.000
2.992
2.000
0
1992
2003
Chile
II Región
Source: National Statistical Institute
Given the high level of income and the significantly
higher growth rate, it is not surprising that Region
II has also achieved the largest reduction in the
poverty rate in the country, with the incidence of
poverty being reduced by 60% from 1990 to 2003,
compared to 41.4% in the country as a whole. As of
the year 2000, Region II had the lowest poverty rate
in the country, at 10.9% of the population, compared
to 20.6% for the country as a whole (www.ine.cl).
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
35
Figure 3.17 Changes in the Incidence of Poverty in Chile by
Region (regions I to XIII), 1990 - 2003
-20.0%
XII
-24.8%
-30.0%
-40.0%
X
VI
VIII
-9.3%
IV
Chile
-10.0%
II
0.0%
-32.3%
-41,4%
-37.3%
-38.3%
-41.7%
-50.0%
-47.1%
-42.2%
-44.5%
-49.3%
-54.2%
-60.0%
Region II, it may be useful to refer to a couple of
studies that are based on the concept of Human
Development Index (HDI) developed by the United
Nations Development Program (UNDP, the Spanish
acronym is PNUD). The UNDP Office in Chile carried
out a broad study of HDI in Chile in 1998, where
HDIs were also calculated for the different regions
and for a more comprehensive set of indicators,
constituting “human security” (PNUD, 1998). These
indicators include seven
dimensions:
-60,0%
-70.0%
●
●
Source: National Statistical Institute
●
●
Unless growth is severely non-inclusive, it would
be expected to lead to improvements in social
indicators. This is indeed the case in Region II,
which has significantly higher literacy rates than
the country as a whole in all age groups, and the
highest adult literacy rate (at 98.2% compared
to national average of 95.8%) in Chile (Instituto
Nacional de Estadística, 2002). Of course, a high
degree of literacy is positively correlated with
average level of education. Employees in Region
II have the highest average number of years of
education in Chile at 11.4 years, while the average
for Chile is 10.67 (Instituto Nacional de Estadísticas,
2002). This is probably a reflection of the dominance
of the mining industry, where most jobs require a
good educational background.
100,0
98,0
98,5
97,9 98,2
95,8
96,0
97,9
97,0
96,4
95,2
97,3
94,7
93,9
93,7
94,0
92,3
92,0
93,9
92,7
XII
RM
X
XI
IX
VII
VIII
V
VI
III
IV
II
I
90,0
Chile
●
●
●
Health
Education and culture
Work
Security for old age ("prevision")
Personal security ("seguridad clasica")
Housing ("vivienda")
Social life ("sociabilidad")
In 2003, the Observatorio Regional de Desarrollo
Humano (Ordhum) made a repeat study for the
larger northern region encompassing regions I-IV
and with some indicators measured for Region
II only. Both studies made a distinction between
the ‘objective’ index of human security, which
used quantifiable measurements of the seven
dimensions based on statistical data, and the
‘subjective’ index, which measured six dimensions,
excluding the housing dimension, and was based on
interviews (for details, see Ordhum, 2004,
p. 30-32).
3.6.3 Results on the Regional Comparison of
Indices of Human Security
Figure 3.18 Adult Literacy Rate, by region, 2002
C. Afta
36
In the UNDP study, Region II had the second highest
objective index of human security, after Region XII,
Magallanes, in the extreme south of the country.
Region II scored particularly high in the dimensions
measuring education and security for old age, due
to a high average level of education and a high
portion of inhabitants who contributed
to pension funds. On the other hand, Region II
had the largest difference in results between
economically active and inactive persons (Ordhum,
2004, p. 36).
Source: National Statistical Institute
3.6.2 Background on Regional Comparison of
Indices of Human Security
In order to provide a more comprehensive and
nuanced picture of socio-economic features of
It is interesting to note that Region II had a
significantly lower rank on the subjective index than
on the objective one, or sixth among the twelve
regions plus the metropolitan area. Two of the other
northern regions also had lower rankings on the
subjective index than on the objective one.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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In the repeat study by Ordhum, which included
calculation of the objective index in the four
northernmost regions, Region II had the highest
ranking for the objective index. The subjective index
was calculated only for Region II (in the three major
cities of the region). As for the subjective index, a
comparison between the results of the Ordhum
study, and those obtained by UNDP in 1998 for Chile
as a whole, shows that work and old age security
stand out as the dimensions where results are
higher in Region II than for Chile as a whole. This
means that the population in Region II has a more
positive appreciation of their situation in these
respects than does the population of Chile as a
whole. Somewhat paradoxically, however, the index
for education is lower in Region II than in Chile,
although the objective index shows the opposite.
One may speculate that people with higher
education also tend to have higher expectations
from the educational system. In addition, Region
II had lower results for social life and personal
security (Ordhum, 2004, p. 58-49).
Although the authors of the study are careful not to
present a too definite interpretation to the results,
they mention as possible explanations that the
inhabitants of Region II appear to be badly informed
and that the low score on social life seems to be
correlated to the one for personal security. To put it
another way, people in Antofagasta are more scared
of being the victims of robbery or burglaries than
they have ‘objective’ reason to be.
3.7 Escondida’s role in regional economic
development
As already seen, Escondida has contributed to the
growth of employment and incomes in Region II
both by directly employing a certain number of
people and by purchasing inputs and services from
local suppliers. Its social programs, managed by
the Escondida Foundation, have also had a positive
impact on employment and income. In addition, the
expansion of the mining industry has necessitated
large investments in infrastructure such as the road
network and electricity generation, and a portion
of these have been financed directly by the mining
companies.
Economic growth in Region II since the late 1980s
has been mainly driven by mining - including
investment in new plants - and complementary
investment carried out by other actors, including
the Government and the non-mining private sector,
to accommodate the demand induced by mining.
According to Aroca (1999, p. 6-7), economic growth
in Region II during the 1980s was almost totally
due to mining investment, in the early part of the
decade by Codelco, in the latter by Escondida.
During these years, Region II had a growth pattern
that was distinctly different from that of the rest of
the economy. In the 1990s, mining investment was
obviously still very important, but as linkages were
formed with other sectors and mining operations
assumed greater importance, induced growth in
other sectors started to become important.
3.7.1 Analysis of economic linkages
The total effects of mining on the economy can
be calculated through input/output analysis.
Simply expressed, input/output analysis uses
a matrix with coefficients that show how much
each sector of an economy purchases from all
of the other sectors. Thus, for instance, an input
coefficient of 0.5 for the mining sector with respect
to the construction sector means that for each
dollar of output generated in the mining sector,
50 cents of additional output will be generated
in the construction sector because of mining
sector purchases. Adding up the coefficients for
all sectors yields a multiplier showing the total
backward linkages and therefore the total induced
increase in economic activity resulting from a given
increase in the output of one sector. For instance,
total backward linkages of 1.5 means that for
each dollar of output generated in a particular
sector, 0.5 dollars of output are generated by all
the sectors. Input/output matrices are usually
constructed for national economies. In the case of
Region II, however, an input/output matrix has been
constructed for the region itself by researchers
at the Universidad Católica del Norte. This matrix
treats Region II as if it were an independent country
and considers all purchases from outside the region
as imports - regardless of whether they originate
from the rest of Chile or from other countries - and
all sales outside the region as exports.
The matrix includes twelve productive sectors, a
final demand sector, and payments to factors of
production: labor (wages) and capital (profits). The
impacts of a change in final demand (i.e. change in
consumption, investment, government expenditure
or export) are measured through the multipliers. In
addition, to overcome the criticism that an input–
output model “tends to underestimate economic
impacts because it omits the interaction between
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
37
38
households’ spendable income (particularly wages
and salaries) that results directly or indirectly from
economic activity and the consequent household
spending on consumer goods” (Isard et al,
1998, quoted in Aroca, 2003, p. 7), the impact of
household spending is estimated according to two
alternative hypotheses, resulting in two multipliers:
●
●
●
Sector
The first one (open system) assumes that none
of the additional income (wages) that is paid for a
change in the final demand is spent in the region
(and that none of it flows back through trade with
other regions).
The second multiplier (closed system) assumes
that all the additional labor income associated
with a change of the demand is spent in the
region.
There are two reasons for introducing the two
hypotheses:
●
Table 3.14 Output multipliers for Region II, 1995
First, a significant proportion of the mining
industry employees have their permanent
residences outside Region II and can be assumed
to spend most of their income in their home
region.
Second, a portion of the income of inhabitants
of Region II is also spent outside the region,
although, as the economy of the region and the
range of available products increases, this portion
would be expected to decline.
In the absence of a household expenditure survey,
there is no basis for an estimate of the portion.
Accordingly, the two multipliers calculated
according to the open or closed system provide a
range bracketing the ‘true value’ of the multiplier.
It should be noted that mining investment and
operation have distinct expenditure structures
and therefore different impacts. While the first is
very intensive in terms of the increase in demand
directed towards the construction sector, mine
operations need very little input from this sector.
The multipliers for the different sectors relevant
to the case of mining operation are shown in Table
3.14. The data refers to 1995. The mining sector is
composed mainly by copper production, which in
1995 represented 84% of the total production of the
mining sector. The mining sector represented more
than 60% of the regional product.
Open system Closed system
Real estate services
1.02
2.33
Other services
1.11
2.52
Agriculture
1.14
1.76
Construction
1.21
2.20
Transport and
communication
1.27
2.35
Mining
1.28
1.80
Manufacturing
1.28
1.79
Retailing
1.31
2.54
Fishing
1.35
2.08
Business services
1.41
2.93
Public administration
1.47
3.96
Utilities
1.66
1.92
Source: Aroca 1999, p. 8.
The open system multipliers vary between 1.02
and 1.66, which means that for one additional
dollar of final demand, the total output of the
region increases by US$1.66 if it is spent in the
utilities sector or by 1.01 if the dollar is spent in the
real estate services sector. If the dollar is spent in
the mining sector it will imply an output increase of
US$1.28.
On the other hand, if it is assumed that new income
that is generated by the additional dollar is spent in
the region, significant differences are found among
the economic impact of the sectors. The impact
on total output is greater when the dollar goes to
service sectors, which are more labor intensive.
The mining sector shows an output multiplier of
1.80, meaning that for each additional dollar that
is spent in the mining sector, 1.80 dollars are
generated in the whole region.
Accordingly, the impact on total output of each
additional dollar spent in the mining sector will be
between 1.28 and 1.80 dollars.
Three points deserve comment with respect to
Table 3.15:
●
First, as seen, there is a significant difference
between the multipliers according to the open
and closed system. This demonstrates the
important impact of wages on the demand
directed towards the individual sector.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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●
●
Second, compared to national input/output
matrices, the multipliers are relatively low.
This reflects the relative lack of economic
diversification within a smaller geographical and
administrative area such as a region compared
to a country, which is also why household
demand derived from wage payments assumes
larger importance.
Finally, the ranking among sectors is different
from that which would be expected in a country.
For instance, manufacturing and mining have the
same multipliers, whereas in the input/output
matrix for Chile, manufacturing would have a
higher multiplier. However, the manufacturing
sector is relatively small in Region II and inputs
from that sector would, in most cases, be
‘imported’ either from the rest of Chile or from
abroad.
In addition to measuring the impact of a dollar
spent in the mining sector, it is also interesting
to know through which sectors the impact is
distributed, that is, which sectors share the 28
and 80 cents respectively. Table 3.15 shows the
linkages between the mining sector and the other
sectors of the regional economy.
Table 3.15 Linkages between the mining sector and other
sectors in Region II, 1995, cents per dollar
Sector
Open system
Closed system
11.5
19.7
Utilities
8.9
16.3
Retailing
5.7
12.7
Business services
While the linkages described up until now refer
to economic activity in the sectors concerned,
income and employment multipliers, which can be
calculated on the basis of the input/output matrix,
provide more detailed information. Each dollar that
is spent in the mining sector implies an increase
in the income of workers in other sectors. Workers
in the mining sector itself receive almost 10 cents,
and between 6 and 14 cents go to workers in other
sectors, mainly the business services and retailing
sectors. The exact amounts depend on how much of
the additional income the workers spend in Region
II.
Table 3.16 shows the employment multipliers,
that is, the impact in other sectors of the addition
of one employment in a particular sector. In this
Table, Escondida is identified separately from
the rest of the mining sector, which at the time
was constituted almost only of Codelco’s Division
Chuquicamata.
Table 3.16 Employment multipliers for Region II, 1995
Sector
Open system
Closed system
Real estate services
1.01
1.34
Other services
1.04
1.21
Agriculture
1.06
1.13
Construction
1.20
1.57
Transport and
communication
1.12
1.22
Rest of mining sector
2.04
2.76
4.1
6.71
Manufacturing
1.39
1.57
Retailing
1.10
1.27
Fishing
1.22
1.25
Escondida
Manufacturing
9.8
Other services
8.8
Transport and
communication
6.7
Real estate services
4.8
Business services
1.45
2.34
Public administration
1.04
1.21
Utilities
4.54
6.29
Other sectors
1.7
1.3
Total
28
80
Source: Aroca, 1999, p. 12-13.
Source: Elaboration based on Aroca, 1999, p. 9-10.
As seen from Table 3.15, the mining sector is
mainly connected with the business services
sector, the utilities sector and the retailing sector.
Under the closed system hypothesis, linkages
with manufacturing, other services, transport and
communication and other services also appear
important.
The figures in the Table mean that if Escondida
hires an additional employee, between 3.1 and
5.7 additional jobs (depending on the assumption
regarding where employees spend their wages)
will be created in the rest of the regional economy.
By contrast, the addition of a worker in agriculture
leads to additional employment of between 0.06
and 0.13 workers in the rest of the economy. The
reason for the high numbers for mining and utilities
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
39
40
compared to other sectors is that these sectors are
capital intensive and that, relatively speaking, each
of their workers requires more inputs. Moreover,
the high relative wages of mine workers mean that,
if spending of wages is taken in to account, as in
the closed system, more employment opportunities
can be created in sectors with lower wages such as
retailing.
The contrast between Escondida and the rest of
the mining sector is striking. The reason for the
difference is that whereas Escondida outsourced
as many functions as possible, the rest of the
mining sector, which for practical purposes can
be taken to mean Codelco, internalized almost
all functions. If workers directly employed by the
two companies are taken into account, the total
number of employment opportunities created was
almost exactly the same (Codelco had about 7,000
employees at the time, while Escondida had 2,000).
It may be wrong, however, to conclude that both
companies had an equal impact on the regional
labor market, particularly if dynamic factors
are taken into account. Escondida’s outsourcing
practices may offer greater opportunities for the
suppliers to grow and deliver their goods and
services to other mines, both in the region and
outside it. These companies could thus form
the nucleus of a mining cluster, that is, a group
of businesses that are linked both by sales and
purchases and by other types of links that create
synergies, such as their use of common resources,
the same skills base, forms of association.
In the late 1990s, at the initiative of the regional
government, a joint program by government and
industry to develop a mining cluster in Region
II was established. The main participants in the
program are the national Government through its
ministerial representatives in the region, the mining
industry and the Industrial Association of Region
II (which also organizes the mining companies).
Under the program, various initiatives have been
taken to foster the development of a mining cluster.
The Government has allocated US$15 million over
the period 2002 to 2006, and this sum has been
matched by the mining companies. To date, the
most important of these has been a drive to assist
local companies linked to the mining industry to
obtain ISO 9000 and 14000 certification. The number
of certified companies has grown from 8 in 2002
to 122 at the end of 2004. The cost of certification
has been shared between the Government, mining
companies and the participating enterprises. It
is believed that the certification will make the
companies more competitive, particularly in export
markets. While it is too early to assess the results
in terms of overall increased export success,
anecdotal evidence suggests that it has worked for
at least some companies.
Finally, it should be noted that the input/output
matrix described here is based on data from 1995.
However, sectoral relationships are usually quite
stable over time, although obviously less so in a
region of a country than in a national economy.
An update of the input/output matrix, using data
from 2000, has been carried out, but the results
are not yet available. However, from contacts with
the researchers responsible for the work, it is
understood that the coefficients have remained
relatively stable over time. Therefore, it could be
concluded that the relationship between the mining
sector in Region II, including Escondida, and the
rest of the regional economy has not changed.
It may at first appear somewhat surprising that
the coefficients have not changed significantly,
since in the intervening time a great deal of
mining investment has been undertaken and local
suppliers have presumably accumulated greater
experience in meeting the needs of the mining
sector. What needs to be remembered, however, is
that while the coefficients may remain unchanged,
the absolute values have increased dramatically.
Mining sector expenditure in 2000 was probably
at least twice as much in US$ terms as in 1995.
Consequently, if the coefficients did not change,
the induced income in other sectors was also twice
as large. Moreover, unchanged coefficients in
this particular case may actually be considered to
reflect a deepening and strengthening compared
to what would have been expected to be the case.
The reason for this is the scaling up of machinery
and the continuous productivity growth in Escondida
and other mines. For instance, in 1995, Escondida
used 50 ton trucks in the mine. It now uses 200 ton
trucks. Each truck needs roughly the same amount
of maintenance regardless of its loading capacity.
Thus, the local company providing mechanical
maintenance would have been expected to receive
only a quarter of the previous income per ton of
ore produced or dollar of mining sales revenue.
While some goods and services would be expected
to remain proportional to output, some would have
seen their coefficients weaken. The fact that the
coefficients have not changed may actually indicate
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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Findings and recommendations
that the interaction between the mining sector
and other sectors of the economy have developed
positively.
3.8 Conclusions
Chile does not have any automatic mechanisms to
recycle government revenues from mining back to
the mining regions. Instead, national government
spending is allocated to regions on the basis of
needs as perceived by the central Government and
this policy appears to be relatively uncontroversial
(although, obviously, the population of mining
districts would of course prefer to keep a larger
share for themselves). Region II has experienced a
highly positive economic and social development,
with rapidly growing GDP per capita, dramatic
reductions in poverty and above average results
on human development indicators. This result
has, by and large, come about as a result of strong
economic growth, reinforced by close linkages
between the mining industry and other sectors
of the local economy. These linkages have been
promoted by the mining companies, particularly
Escondida, and it is likely that they would have been
considerably weaker without this active promotion.
The efforts to build linkages do, however, go much
beyond simply nurturing suppliers on an individual
basis. The mining cluster in Region II (which,
although it is concentrated to that region is not
limited to it) was a joint initiative by the national
government and the mining companies in Region II,
with Escondida being the main driving force on the
industry side. It has focused not just on adapting
suppliers’ practices to the needs of their Region II
customers, but on raising their competitiveness on
international markets by supporting their efforts
to get ISO 9000 and 14000 certification, a more long
range strategy than one might normally expect.
The vision for the economic future of Region II has
not been clearly articulated, although it is clear
that efforts to diversify the local economy are
supported by both the government and by all other
interested parties. Neither the Government nor the
companies appear to see any need for any radical
changes in long range strategy at the moment. The
question that could be asked is whether Region
II will continue being a mining region or if other
sectors will eventually overtake it. As long as the
region continues to attract mining investment at the
present rate, however, the answer to this question
will have to be postponed.
3.9 Summary
Chapter 3 has examined the economic and social
contributions of mining in Chile at the national,
regional and local level. It has shown that at the
macroeconomic level the mining sector has made
considerable contributions and investment in
mining has sharply increased since the late 1980s.
Other economic activities have also increased
resulting in the share of ores and metals in
merchandised exports to decrease. Improvements
in living conditions and the reduction of poverty
have also been impressive, with the amount of
people living in poverty decreasing by nearly 50%
since 1990. The channeling of government tax
revenue from mining into investment in social
development appears to have played an important
role in this process.
The fact that mining revenue is not earmarked for
redistribution to mining regions suggests that the
directly identifiable positive economic and social
impact of the mining industry at the regional level
has not primarily taken place through redistributive
measures according to a predetermined formula.
It appears to have resulted from synergetic and
complementary economic activities that have
delivered inputs to, or have benefited from, the
presence of the mining industry. Mining regions are
of course likely to have benefited to the same extent
as other regions from the Government’s general
expenditure on development, a significant part of
which derives from mining tax revenues.
As concerns Region II specifically, the region has
experienced faster economic growth than Chile as
a whole, resulting in per capita income being about
twice as high and poverty having fallen dramatically.
Region II also outperforms almost all other regions
on most non-monetary human development
indicators such as literacy. At the same time,
subjective indicators, as well as interviews on site,
reveal some concern over ‘quality of life’ issues.
Some of these concerns no doubt arise from
what could be described as ‘growth pangs’ in an
environment characterized by rapid economic and
social change. Some may have more to do with
the physical and geographical features of Region
II, with its lack of vegetation and remoteness from
major urban centers. The mining industry in
Region II has established unusually strong linkages
with the local economy. Local suppliers to mining
companies have flourished, partly as a result of
deliberate targeting and fostering of local suppliers
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
41
42
on the part of mining companies, particularly
Escondida. Mining companies and the Government
have also jointly supported the establishment of a
‘mining cluster’, particularly by providing finance
for suppliers seeking to obtain ISO 9000 and 14000
certifications.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
What is the linkage between mining Investment
and economic growth and poverty Reduction?
4
43
4. What is the linkage between mining
Investment and economic growth and poverty
Reduction?
4.1 Overview
This chapter largely applies Stage 4 of the Toolkit
and explores the proximate linkages between
mining investments and economic growth and
poverty reduction. It focuses on the impact
that economic policies have had on the positive
outcomes described in Chapter 3 (Section 4.2) and
whether governance indicators explain this success
(Section 4.3).
4.2 The Impact of Economic Policies on Outcomes
at the National Level
This Sub-Section summarizes the main
macroeconomic policies conducted and their
impact on key indicators. It also establishes
whether in recent years Chile has suffered from an
attack of ‘resource curse’.
Figure 4.1 The Real Effective Exchange Rate
Real Effective Exchange Rate for Chile 1980 - 2004
Successive generations of the “Chicago Boys”
have been able to prove that the macro-economic
dimensions of ‘resource curse’ can be avoided if
governments have the capacity and the willingness
to manage the potentially negative macroconsequences.
A key contribution to Chile’s economic success
lies in the exchange rate policy. After the 198182 crisis, as can be seen from Figure 4.1, the
policy was to generate a real depreciation of the
currency and between 1982 and 1988 the real rate
depreciated by around 60%. The gentle appreciation
towards the end of the 1990’s evident in Figure
4.1 was rapidly corrected. As already noted, a
significant appreciation has occurred over the last
two to three years, and it is not yet clear to what
extent this will impede competitiveness. Apart from
any other consequence, this exchange rate policy
encouraged new high-value agricultural exports to
spearhead a general export led economic revival.
Figure 4.2 Budgetary picture
Real Effective Exchange Rate
200
CHILE - Fiscal Deficit/Surplus & Budgetary Revenues
as a Percentage of GDP 1960 - 2000
180
160
Fiscal Deficit (-) / Surplus (+) as a % of GDP
120
40%
100
80
30%
60
20%
40
20
10%
Source: IMF International Financial Statistics
The economic policy story of Chile is far from
being all plain sailing. Mistakes were made and
policies were often “unstable and inconsistent over
time” and on occasions far from the neo-liberal
economic policies associated with the “Washington
35
Consensus” . For example the ‘big bang’ reform
program of 1978-82 proved to be erroneous. It
allowed exchange rate appreciation to break the
inflation levels but led to capital inflows, which
triggered a balance of payments crisis once the
copper price fell, threatening domestic financial
36
stability . Nonetheless, those directing Chile’s
macro economic policy – the so-called “Chicago
37
Boys” – were willing to learn from their mistakes.
Stevens, 2005.
Schurman, 1996.
37 So called because some of them had degrees from the University
of Chicago and those who did not received much of their intellectual
inspiration from the monetary economics of this university and its most
well known proponent, Milton Friedman.
35 36 Budgetary Revenues as a % of GDP
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
0%
-10%
1964
2001
2002
2003
2004
1998
1999
2000
1994
1995
1996
1997
1991
1992
1993
1987
1988
1989
1990
1984
1985
1986
1980
1981
1982
1983
0
1962
140
1960
INDEX (100=2000)
44
-20%
Source: World Bank
At a fiscal level, budgetary prudence has also
been central to macro-economic policy since the
mid 1970’s. Figure 4.2 shows that for most of the
period the budget has been run at a slight surplus.
Budgetary revenue has shown a gentle decline as
a percentage of GDP from around 30% in the late
1970s to around 20% in the 1990’s in part reflecting
a reduction of government intervention in the
economy.
Another key element in the policy story was the
success in tackling inflation. Figure 4.3 shows
clearly the hyperinflationary years of the Allende
Government.
Thus, the authoritarian Government of Pinochet
was able to reduce inflation to manageable
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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Figure.3 Inflation, 1961-2003
Inflation (Consumer Prices) - Chile 1960 - 2003
Annual % Change
600
Inflation, consumer prices (annual %)
500
400
300
200
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
0
1961
100
Source: World Bank 4
Figure 4.4 Inflation, 1993 - 2003
Inflation (Consumer Prices) - Chile 1960 - 2003
Annual % Change
600
Inflation, consumer prices (annual %)
500
400
300
As indicated in Sub-Section 3.2, the development of
exports is the key to understanding the basis of the
Chilean success story as expressed in the growth
of non-mineral exports shown in Figure 4.5 above.
From the early 1980’s, successive governments
committed themselves to integrating Chile further
into the global economy. Thus trade liberalization
policies included two unilateral tariff reductions
(1991 from 15 to 11% and in 1998 from 11% to 6%)
plus a variety of free trade agreements with Latin
38
American neighbors, Canada and the United
States. As can be seen from Figure 4.6 and Figure
4.7, this has led to a steady growth in non-mineral
exports. Exports as a percentage of GDP has
increased from the low of 10% in 1973 to over 35%
today. Minerals have played an extremely important
part in the story of expanded exports. However,
the growing volatility of mineral exports after 1992
disguises the fact that by virtue of the Copper
Stabilization Fund described earlier, the impact of
such volatility on Chile’s public finances has been
significantly muted.
Figure 4.6 Exports, as a percentage of GDP
200
100
40
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
Exports of goods and services (% of GDP)
1961
0
35
30
Source: World Bank
25
proportions by the end of the 1970’s, although this
was often done at considerable costs, not least in
terms of increasing unemployment. In 1992, the
Central Bank was given autonomy and allowed to
pursue its own policies to meet inflation targets.
Figure 4.4 shows that this has proved extremely
successful. Monetary policy has been central to
Chile’s policy in inflation and exchange rates.
20
15
10
5
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
0
Source: World Bank
Figure 4.7 The Role of Government in the Economy
Inflation (Consumer Prices) - Chile 1960 - 2003
Figure 4.5 Exports
Annual % Change
600
Inflation (Consumer Prices) - Chile 1960 - 2003
Annual % Change
600
500
Inflation, consumer prices (annual %)
400
500
300
400
200
300
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
Source: UNCTAD
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
0
100
1961
100
200
0
Inflation, consumer prices (annual %)
Source: World Bank
38 Aninat, 2000.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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46
An integral part of the Chilean success story has
been the policy drive to reduce direct government
intervention in the economy and to facilitate the
role of the private sector. Using government
consumption expenditure as a proxy, Figure 4.7
shows that the ‘structuralist’ policies of the 1960’s
had inexorably led to a growth of government
intervention in the economy and that expenditure
remained high until the later years of the military
regime. Following the overthrow of Allende, the
Pinochet Government sought to roll back the direct
economic role of the State and create an enabling
environment to encourage the development of
39
the private sector . However, it has not done so
dogmatically, but selectively. In the mining sector
the state-owned company Codelco remains a
prominent player.
●
●
A number of key points emerge from the analysis
of Chile’s economic and social experience at a
national level:
●
●
39 The potential negative economic effects of having
a dominant mineral sector are well understood
and have been countered by macro-economic
policy based upon fiscal prudence and a sound
monetary policy to control inflation and to avoid
real exchange rate appreciation. However, for
Chile there was a period of learning by doing and
macro-policy mistakes were made. Lessons were
quickly learnt and the mistakes not repeated.
These lessons have general applicability and
thus today there is, in principle, no reason why a
dominant mineral sector should cause macroeconomic damage. Arguably, at a national level,
assuming political consensus on the part of the
governing coalition to promote generally good
policies, the macro-economic dimensions of
‘resource curse’ should no longer be an issue.
However, the policy prescriptions have been
known for a long time and not all governments
have followed them. The purpose of the
Resource Endowment initiative is precisely to
attempt to determine under what circumstances
governments are able to follow these generally
accepted policy prescriptions.
An export oriented economic policy, coupled
with enabling and encouraging private sector
involvement, produces a sound economic growth
performance. However, to produce this result,
various episodes of government intervention were
required to create the environment in which the
private sector could flourish and complementary
Stevens, 2005; Hojman, 2000.
●
●
●
●
linkages between different economic sectors
could be established.
Mineral tax revenue, mainly from the state-owned
mining companies, but increasingly from privately
owned companies, has been channeled into
development expenditure. This has both relaxed
constraints on government spending and, through
the operation of the Copper Stabilization Fund,
reduced fluctuations in such spending.
Economic growth is essential for sustainability,
improved social conditions and a reduction in
poverty. However, the cause and effect is by no
means automatic and arguably, in the early days
of the economic reform program, poverty did
increase and social conditions did deteriorate.
Poverty levels have come down markedly since
the restoration of democracy in the 1990s.
This suggests serious efforts on the part of
government to enforce trickle down mechanisms.
However, except for housing, these do not
appear to link to particularly institutionalized
redistribution channels using fixed formulas,
but rather to effective public policies that have
encouraged growth in human capital, allowed
the private sector to flourish and promoted
consensus building across different social groups
to share the benefits of increased economic
activity. Over the medium term it will be important
that the comparative advantages that Chilean
entrepreneurs have occupied in the export
markets remain competitive (i.e. natural resource
based products), or that the gains made from
current exports are utilized to build comparative
advantages in new industrial sectors.
Trade liberalization has been compatible with
the development of new economic sectors.
These sectors have been important in increasing
employment, which in turn has been the principal
reason for the decline in the incidence of poverty.
Mining can produce good local and regional
economic gains without any explicit mechanism
for redistributing mineral revenues and without
decentralized government. Arguably, equity
is best served by redistribution of revenues to
poorer regions (i.e., the non-mining regions).
A stable regime of competitive mining taxation
is helpful (but not sufficient) in attracting mining
investment. However, mining taxes are usually
‘rear-end loaded’ and thus take time to deliver
fiscal benefits.
Revenue stabilization funds work best if they are
insulated from political pressures (both local and
national). The payoff from exchange rate stability
has been economic diversification.
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4.3 Do Institutions and Governance Structures
provide the Linkage?
The ICMM initiative has strongly emphasized that
institutions and governance structures are a key
variable for enhancing the positive contributions
that the mining sector can make to broaden socioeconomic development and to reduce poverty.
Institutions and governance structures set the
framework for and condition how public sector
entities, citizens and private sector companies
relate to each other. For the mining industry
this means that if institutions and governance
structures are unable to establish consensus
among these groups, the contributions that mining
activities can make to broader socio-economic
development and poverty reduction will be
constrained.
This emphasis on institutions and governance
structures is supported by internationally
acknowledged research which, during the course
of the 1990s, has confirmed that the quality of
‘governance’ as an independent variable explains
much of the cross-country differences in socioeconomic outcomes. In the context of the ‘resource
curse’ literature a number of quantitative studies
have suggested that improved governance
structures and institutions correlate with better
40
development outcomes . It would strongly appear
that Chile’s success in using macroeconomic
achievements and economic growth to reduce
poverty and broader social inclusion has been
facilitated by its institutions and governance
structures.
Certainly, Chile’s performance with regard to
conventional governance indicators has been
impressive by all standards. Annex 2 reports in
detail on the quality of governance in Chile as
measured by the six World Bank (WB) Governance
Indicators. These indicators would most likely
appear in the governance conditionality that the
Extractive Industries Review (EIR) proposed. Annex
2 also reports on Chile’s results regarding six
governance arenas proposed by the United Nations
University’s (UNU) World Governance Survey. This
Sub-Section summarizes the results.
There are general, but important, caveats:
● It is only relatively recently that the international
community has fully recognized the importance
Researchers have made use of indicators on the quality of governance
reported by a number of survey institutes, think tanks, non-governmental
organizations and international organizations and compiled on the basis
of perceptions gathered from a large number of enterprises, citizens and
expert survey respondents.
40 ●
of institutions and governance structures in
economic development. Thus, the time series
for which data is available is short; for the WB
Governance Indicators these are less than a
decade and the UNU World Governance Survey
only provides four years worth of data. Another
consequence is that the definitions and emphases
of individual sub-variables aggregated to an
overall assessment of the ‘quality of governance’
remain disputed and subject to refinements.
Furthermore, existing governance indicators have
been defined to serve a number of objectives
and in a number of areas. However, it is not
obvious why all dimensions of governance are
equally relevant to different sets of problems. It
is also possible that there are trade-offs between
the different dimensions. Annex 2 gives the
definitions and concepts underlying the indicators
that are used here.
4.3.1 Chile’s Performance on Governance
Indicators: Summary
Both, the WB Governance Indicators and the UNU
World Governance Survey show that Chile’s lead in
the region remains unchallenged. This can clearly
be seen from Figure 4.8. Chile’s lead remains
greatest for the two indicators that measure the
respect of citizens and the state for the institutions
that govern economic and social interactions (‘Rule
of Law’, ‘Control of Corruption”, and “Regulatory
Quality”). It is smallest for the indicators that
measure the process by which governments are
selected, monitored and replaced (‘Voice and
Accountability’ and ‘Political Stability’). Compared
to previous years, these gaps appear to have
narrowed.
Figure 4.8 Chile (green) compared to Latin American averages
(yellow and brown), 2004
CHILE (2004)
Voice and
Accountability
Political
Stability
Government
Effectiveness
Regulatory
Quality
Rule of Law
Control of
Corruption
Comparison with regional average (Latin America) (lower bar) Country’s Percentile Rank (0-100)
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
47
48
Figure 4.9 Chile’s Governance Indicators from 1996 to 2004
2.5
Voice and Accountability
2
Political Stability
1.5
Government
1
0.5
Effectiveness
Regulatory Quality
0
Rule of Law
-0.5
1996
1998
2000
2002
2004
Control of Corruption
Figure 4.9 depicts Chile’s performance on the
six WB indicators from 1996 to 2004. The data
shows that during the late 1990s there was a
slight deterioration regarding the two indicators
that relate to the process by which governments
are selected, monitored and replaced (“Voice and
Accountability” and “Political Stability and Absence
of Violence”). However, both indicators improved by
2002 and remained nearly unchanged in 2004.
The two indicators measuring the capacity of
government to effectively formulate and implement
sound policies do not show much variation over the
eight-year period. However, they appear to mirror
each other: “Government Effectiveness” improves
when “Regulatory Quality” deteriorates, and vice
versa.
With regard to the respect of citizens and the State
for the institutions that govern their economic and
social interactions, one of the indicators - “Control
of Corruption” - showed an improvement from
1998 to 2000, almost in parallel to that of “Political
Stability”. Whilst there is a slight deterioration
thereafter, over the eight-year period this indicator
improved most strikingly, together with “Voice and
Accountability”. The only indicator that deteriorated
over the eight-year period is the “Rule of Law”.
Chile’s results of the UNU World Governance
Survey largely confirm those of the WB Governance
Indicators (for details see Annex 2). They also
points out that respondents in Chile unambiguously
felt most confident with respect to how economic
society is governed, both in 1996 and in 2000. The
UNU results provide further details and have noted
that specific improvements in recent years have
included a decrease in political discrimination
and greater subordination of the military to the
civilian government. The least improvements have
taken place with regard to the performance of the
bureaucracy, which is now observed as the weakest
link of Chile’s governance structures.
Annex 2 also compares in more detail Chile’s
results with that of its neighboring country Peru.
One of the key observations is that Peru’s absolute
improvements over the past years have been
greater than those in Chile. In particular Chile’s
lead has diminished with regard to the legislative
process and the performance of the bureaucracy.
On the other hand, Chile’s lead with respect to
the governance of the economy has also been
confirmed. Chile’s particular strengths compared
to Peru lie in citizens’ respect for the system of
rule making, clarity in judicial decision-making
processes and public officials’ respect for property
rights. But for both countries, the performance
of the bureaucracy and the judiciary remain the
weakest aspects of governance.
4.3.2 Implications
What do these results indicate? Chile
unambiguously leads the region in terms of
standard measures for the quality of governance.
It would appear that the country has been better
governed than any of the other Latin American
countries. However, data on governance indicators
has only been collected for a short period of time.
Thus the indicators can only suggest that Chile has
been well governed since the second half of the
1990s. Indicators do not explain how Chile managed
to achieve this performance in the first place.
Taking into account Chile’s contemporary political
history summarized in Annex 3, it is plausible to
assume the following:
●
●
●
Had indicators been compiled for earlier periods,
Chile’s performance on the process by which
governments are selected, monitored and
replaced would have looked much worse, at least
up to the democratic transition in 1990. Therefore,
significant improvements for this governance
dimension must have been achieved in the early
1990s.
The same logic is partially plausible with regard
to the respect of citizens and the State for the
institutions that govern their economic and social
interactions. This at least, if respect is considered
a voluntarily rather than coerced action.
Substantial improvements to the capacity of
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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1 Report Summary
Findings and recommendations
the government to effectively formulate and
implement sound policies are more likely to have
been achieved prior to the early 1990s. Earlier
sections of this report suggest that improvements
in this area have preceded the democratic
transition. Furthermore, building economic power
and administrative capacity are likely to have
been of great importance for backing the political
power of the authoritarian Pinochet Regime.
Chile’s most impressive achievement would
appear to have been that the political transition
at the end of the 1990 managed to fundamentally
improve political rights and accountability without
undermining the economic and administrative basis
on which the former regime had rested. This has
helped Chile to avoid falling back into a vicious cycle
of opposing interest groups fighting over particular
stakes within the context of the democratic process,
leading to collectively undesirable outcomes.
It would appear that this is what distinguishes
Chile’s economic and social success. If this logic
holds true, the key question is what governance
structures and processes have allowed Chile to
follow this path and to overcome the collective
action problems that other countries have typically
faced. In the context of this study on mining, the
next question is how this has impinged on the
transmission links between the presence of, and
revenue from, mining activities and the social and
economic benefits that citizens have gained from
these.
In summary, governance indicators tell us
little about the socio-political processes that
have allowed Chile this head start (for example
compared to its neighbor Peru). But cross-country
comparisons help to raise the important questions.
For answers, it requires further probing into
governance structures and processes.
How and why do these results matter for the mining
industry? From this report one can so far conclude
that Chile’s institutions and governance structures
and its policy processes have not only achieved
positive macroeconomic results at the aggregate.
Chile has also managed to activate synergies and
complementarities between different economic
sectors and trickle down mechanisms, with
which other countries are struggling. It is entirely
plausible to suggest that the country’s governance
performance has been key in entrepreneurs
taking advantage of economic opportunities and
in better delivery of public goods and services.
Thus, it is plausible that this has been key in
linking the presence of the mining industry with
the development of other economic sectors and the
trickle down mechanisms through which greater
economic activities and government revenue
provide social and economic benefits to citizens.
But these conclusions still leave many questions,
including the following:
●
●
●
●
How, in effect, have Chile’s governance structures
and policy processes encouraged private sector
activities by different-sized enterprises and
across different economic sectors, which have
reduced poverty through employment creation?
How has Chile’s public sector struck the balance
between providing an enabling environment for
the private sector and the provision of public
goods and services that help to redistribute
economic wealth? And how, in particular, is this
balances struck at different tiers of government
(national, regional, municipal)?
Why does Chile outperform other countries
most strikingly in how it governs entrepreneurial
activities, and what political constellations have
enabled it to do so?
How has Chile built credibility with the
international mining industry to such an extent
that it reinvests profits in new mines, thereby
making it worthwhile for other entrepreneurs to
establish long-term relationships with the mining
sector?
The answers to these questions impinge on the
concrete measures that the mining industry
can take to contribute to enforcing trickle down
mechanisms. There are two preliminary leads:
●
●
41 42 First, the UNU World Governance Survey suggests
that the country has established a specific
pattern of policy consultations and that this type
of collaboration between public institutions and
the private sector has been an important factor
41
contributing to the country’s economic success .
Second, although the quality and magnitude
of investment in human capital has improved
considerably, the single largest contribution to
poverty reduction during the 1990s has come
from additional employment opportunities, most
of which have taken place in newly emerging
industries, rather than Chile’s traditional export
42
industries . In this context it would appear that
UNU, Hyden et al, page 158
ILO 2003
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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50
the mining sector has played a kick-starting role
in facilitating and stimulating other economic
activities. Unfortunately, there is little evidence
to assume that the underlying mechanisms are
automatic. Using the taxonomy of the Toolkit,
Chapter 5 will probe more deeply into these
issues.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
What are the reasons
behind the ‘success
factors’?
5
51
5. What are the reasons behind
the ‘success factors’?
52
5.1 Overview – the Story so Far
Chapter 4 has probed into the proximate linkages
between mining investment and economic growth
and poverty reduction and has asked how Chile’s
institutions and governance structure have
managed to facilitate economic activities that have
created employment and reduced poverty. The
contrasting experience of other mining countries
analyses within the context of the ICMM Resource
Endowment initiative suggests that Chile has
provided an environment, which has achieved better
synergies between the mining and entrepreneurial
activities in other economic sectors. The task of
Chapter 5 is to explore, in greater detail, plausible
explanations for this success.
Due to time and resource constraints, this Chapter
5 is not as comprehensive as the two main studies
of the Resource Endowment initiative undertaken
for Ghana and Peru. It covers more selectively
issues that are important in contrast to the two
main studies.
Some factors have clearly contributed to Chile’s
success in both attracting mining investment and
converting mining exports into development gains.
The time available for the case study did not allow
an in-depth assessment of these factors, although
their positive impact is undisputed. Among factors
contributing to Chile’s attractiveness for mining
investors are:
●
●
●
Favorable geology, including potential for large
mineral deposits
Exploration capacity
Developed port infrastructure
As has already been observed, one of the factors
behind the favorable development in Region II has
been the synergies between mining and other
sectors. It should maybe be emphasized that this
synergy would probably have been more difficult to
attain without the investment in human capital that
has taken place since the return of democracy and
which has improved the capabilities of the suppliers
to the mining industry.
5.2 Legal Framework and Regulatory Environment
for Mining
5.2.1 Introduction
could cover a broader range of issues, this SubSection focuses on Chile’s mining legislation, tax
legislation and recent changes in environmental
regulations.
5.2.2 Mining Law
Chile’s current mining law dates from 1983 . It
contains detailed and unambiguous rules that aim
to provide security of mine titles and give guidelines
for the resolution of conflicts. It is unusual in
that it provides protection and supplies specific
solutions as far as organization of enterprises is
concerned to small-scale mining. The law 18.097,
“Ley organica sobre concesiones mineras”, which
has constitutional status and protects the right of
a concessionary to his mining concession, adds
detailed regulations on mining rights and, inter
alia, defines the duration of a mining concession
(concesión de explotación) as indefinite.
43
5.2.3 Foreign Investment and Mining Taxation
Legislation
The law on foreign investment, the decree law
number 600 of 1974, one of the first legislative
initiatives of the Pinochet regime (with revisions
to details through another decree, number 523,
in 1993), provides the basic conditions for all
foreign investment, including foreign investment in
mining. It provides very robust guarantees against
nationalization and expropriation. It also defines the
most important aspects of the taxation of foreign
enterprises that invest in mining or other sectors in
Chile. All taxes are paid to the central Government,
with the exception of the mining patent, an annual
fee that has to be paid to protect the mining
title, which is paid to the region. In contrast to
many other mining countries (e.g. Ghana and
Peru), there does not appear to exist a particular
institutional channel through which mining revenue
is redistributed to those regions in which the mining
revenue is generated.
The foreign investor may choose to be taxed under a
special regime providing invariability of income tax
for ten years (which could be extended to
20 years for investments over US$50 million), or
the general regime, which provides no protection
44
against changes in tax legislation . Following
See www.cochilco.cl for the full text.
See Otto, 2000, for a summary of Chilean tax legislation as regards
mining. While details have changed, the summary is mostly still valid. The
Chilean legislation provides two alternatives of incorporation: companies
with limited liability (sociedades anónimas) and “partnerships”, a mode of
43 44 The first column of the taxonomy is entitled Legal
and Regulatory Framework. While in principle this
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the invariability regime, corporate income tax is
45
17% (“first category tax”) on accrued income and
42% in additional withholding tax on dividends,
distributions or remittances with the 17% credited
against this levy. Under the general regime, the
first category tax is 17% and an additional tax
of 35%, against which first category tax can be
credited. Of 23 foreign mining companies that have
invested under decree number 600, five, including
Escondida, have chosen the general regime, while
the others have all elected the invariability regime.
As companies begin to declare taxable profits (see
below) they are increasingly moving to the general
46
regime . Once a company has chosen the general
regime, it is not able to reverse the choice.
The legislation is generous to investors with
respect to deductions for feasibility studies, preproduction exploration costs and development
costs, all of which can be capitalized and deducted
over a period of years. Companies can also use
accelerated depreciation of capital investment.
Losses can be carried forward indefinitely. A limit
on debt/equity ratio is imposed, at present at 75/25,
to avoid investors disguising transfers as interest
payments. A representative ratio for international
mining companies registered on stock exchanges
is 30/70 (debt/capitalization), but comparisons are
difficult since the mining companies holding an
investment agreement under decree number 600 in
47
Chile are not registered on stock exchanges . It may
also be misleading to compare project finance with
corporate balance sheets.
Chile certainly has other advantages to offer foreign
mining investors, most important of which is a very
favorable geology, but also good infrastructure
with short distances to ports, a favorable
climate with extremely low rainfall in the main
mineralized zones (which simplifies environmental
management), and stability leading to low country
risk. The taxation system is, however, an important
attraction. It is ranked among the most competitive
in the world, as has been shown by Otto (2000).
Chile also has in force Double Tax Treaties
corporation mainly intended for smaller companies. Most large foreign
mining investors use the second form of incorporation. The main difference
is that under the latter form of incorporation, remittances corresponding
to financial income are not taxed if they exceed the “taxable profits fund
(FUT)”, which consists of accumulated taxable profits with deduction for
taxes paid (del Pino, 2004, p. 16-17). The WHT on such remittance will be
deferred and paid once the FUT becomes positive.
45 Pursuant to the Law 19,753, Published at the Official Gazette on
September 28, 2001 the First Category Tax Is 17% since January 1, 2004
46 del Pino et al, 2005, p. 255.
47 del Pino et al, 2004, p. 19.
to avoid double taxation with Argentina, Spain, Peru,
Ecuador, South Korea, Norway, Brazil, Mexico,
Canada, Poland, United Kingdom, Denmark, Croatia
and Sweden.
5.2.4 Recent Changes in Mining Taxation
In recent years, there has been heated public
debate in Chile, both in media and in Congress, over
48
tax payments by foreign mining companies . It has
been argued that these payments were relatively
modest, considering the weight of mining in GDP
or exports or compared to the amount of foreign
investment in mining that had taken place since
the early 1990s. As has already been mentioned
in Chapter 3, the ten largest foreign owned mining
companies paid a total of US$ 2,136 million in
tax or on average US$164 million per year from
49
1991 to 2003 . In comparison the two state-owned
companies Codelco and Enami have made tax
payments of over US$9,700 million for the same
50
period of time . Of the ten, two companies paid
taxes throughout the period. Escondida is one of
these two companies. Two others paid taxes for
the first time in 2003. One had accumulated losses
that exceeded its taxable profits and the other five
had not yet started to pay taxes, mainly because
they started up late and were still benefiting from
the provisions on accelerated depreciation. There
are two main reasons why tax payments by foreign
owned mining enterprises have been relatively low:
●
●
Except for one or two years, copper prices had
been at a historically low level during the period
in question, and companies' profits therefore
had been relatively modest (according to del
Pino et al., 2005, p. 49 the average rate of return
on equity and on total assets of the ten largest
foreign mining companies during the period
1999-2003 was respectively 14.5 and 5.7%, which,
however, was higher than mining and metals
companies in the United States, at 6.3 and 3.1%).
Most of the large foreign owned mines began
production during the 1990s, and consequently,
since they had mostly used the possibility of
accelerated depreciation offered by the law, they
in
The debate was sparked by the sale in 2002 of the Mine Disputada de
Las Condes for a sum of US$ 1,500 million by its owner, Exxon, to Anglo
American. No tax had ever been paid by Exxon and since the sale took place
outside Chile, Exxon’s income would not be subject to capital gains tax
(Ministerio de Minero de Chile, 2005, p. 6-7).
49 del Pino et al, 2005 p. 240.
50 Codelco has a special tax regime, under which, in addition to first
category tax, it pays a 40% tax on profits (this is a tax on public enterprise
profits). It also pays 10% of its copper sales revenues to the armed forces
(del Pino et al., 2005, p. 245).
48 The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
53
54
had had very low taxable profits; tax payments
would increase once the possibility to use
accelerated depreciation had been exhausted, as
51
it would shortly be in most of the mines.
During the course of the debate, several proposals
were made to raise government revenue from
foreign mining investment.
●
●
A first government proposal failed in July 2004
to achieve the necessary qualified majority in
the Chamber of Deputies (the lower house of
Parliament).
A second proposal was passed in April 2005 and
became law in June 2005 (Law 20,026 Specific
Mining Tax).
In general terms, the bill imposes a tax on
mining activities based on 5% of the value of
the operating taxable base for all Chilean mines
whether foreign or domestic owned. For copper
mines, production thresholds to exclude certain
medium mining companies have been introduced
as follows: companies with sales lower than 12,000
metric tones are exempt, and sales within 12,000
tones to 50,000 tones pay progressive rates up
to 5%. Operating taxable base excludes interest
expense, accumulated tax losses, accelerated tax
depreciation and applies six year amortization (not
upfront deductions) for start up and organization
costs.
The tax will apply on income as of January 1st 2006
and will be due jointly with the yearly Chile income
tax return in April 2007. Taxpayers subject to this
mining tax must make advance provisional tax
payments on account of the yearly tax, based as
a percentage of gross revenue. If the percentage
cannot be determined, the rate will be 0.3%. The
rate is adjusted every year by the percentage
prepayments exceeded, or where less than the final
tax due.
Payment of the mining tax is to be deductible for
Chilean first category tax (FCT) purposes.
Companies with tax invariability agreements are
subject to special provisions.
It is expected that most of the revenue from the tax,
or 85%, will go to a special fund to finance research,
while the rest will finance development in the
52
regions where mining takes place .
According to calculations made by del Pino et al.
(2005, p. 256), the new tax will generate US$400
million in additional government revenue over the
period 2006-2010. Del Pino et al. calculate that
total tax revenue from the ten largest foreign owned
mining companies will be US$4,356 million over
this period, or US$871 million per year on average.
The increase from earlier years is mainly due to
the fact that investments will be depreciated (the
assumption for copper prices is 93 cents per pound,
compared to 92 cents 1991 to 2003, and 130 cents in
2004).
5.2.5 Environmental Regulations
The environmental law dates from 1994 (Ley 19.300)
and is modern in its approach. It contains standard
mechanisms and instruments for the approval
of projects and for monitoring of environmental
53
effects .
5.2.6 Summary
Chile’s mining legislation dates to 1983 when
it was introduced by the Pinochet Government
to attract foreign direct investment. Contrary to
other mining countries (e.g. Ghana, Tanzania and
to a lesser extent Peru) where changes in legal
stipulations led to a subsequent increase in foreign
direct investment in the mining sector, this did not
immediately take place in Chile. State-ownership
of the mining industries dominated for almost
another two decades before foreign privately owned
enterprises started to compete with the national
mining industry. Thus, the Chilean experience
defies the argument that good geological prospects
and the introduction of competitive mining
legislation is suffice to stimulate investment in
the sector. And although Chile’s nationally owned
mining industry is no longer dominant, it remains
one of the larger (and important) producers.
In the context of this case study, disputes over
the legitimacy of mining legislation have not
featured as a matter of concern. Recently there
has been a national debate on whether Chile’s tax
legislation for the mining sector is adequate, and
if there is scope to increase government’s tax take
Chile’s low spending on research (0.7% of GDP, compared to more than
six times as much in countries such as Sweden or Finland) was one of the
main arguments used by the Government for the tax (Ministerio de Minería
de Chile, 2005, p. 8).
53 See www.cochilco.cl for the full text.
52 According to del Pino et al., 2004, p.18, the accumulated deferred tax
due to accelerated depreciation by the ten largest foreign owned mining
companies was US$ 759 million at the end of 2002.
51 The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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Phase
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Findings and recommendations
from privately owned mining companies. These
debates are part of Chile’s democratic process.
Mining investors have to rely on this process, and
for Chile’s legislators to derive at a tax policy that
strikes an adequate balance between the funding
needs of the public sectors and political and
business interests of the private sector. Chile’s high
ranking on international tax competitiveness does
not suggest that some change to Chile’s current
tax legislation will fundamentally deter investors’
interests in the country’s natural resource deposits.
5.3 The Political-Administrative System
Chile’s contemporary political-administrative
system is based on partial reforms in 1989 of the
Constitution introduced by the Pinochet Regime
in 1980. These reforms prepared for the transition
to a civil government after in 1988, the military
regime had lost a plebiscite on the continuation of
its rule. Chile’s constitution sets out a presidential
democracy where the directly elected president
heads the State, the Government and the
Administration. The president ensures the country’s
internal order and external security. The following
Sub-Sections describe various aspects of Chile’s
54
political administrative system . Most recently
th
(on September 17 , 2005), the Chilean Congress
has enacted various changes to the Constitution,
revising a number of institutional features enacted
by the outgoing Pinochet regime in preparation for
the return to a civil government.
Political observers have noted that Chile’s political
culture has changed fundamentally from what it
had been prior to 1973 and how it was until the
late 1980s. (Annex 3 provides a brief summary of
Chile’s recent political history.) Until 1973 society
was divided into different political camps and party
politics was the deciding factor of government
policies. With industrialization and the expansion of
suffrage during the period from 1930s to the 1970s
parties to the left of the political spectrum gained
importance. Historians link the inability to forge
a stable consensus among increasingly diverse
social interests as a reason for the breakdown of
democracy in Chile in 1973.
Ideological polarization still featured until the
end of the 1980s, although it was militarily
suppressed. Since the late 1980s, however, political
moderation and pragmatism are said to have
Large parts of this chapter are based on Chile – a country study: http://
www.country-data.com/frd/cs/cltoc.html
54 taken over and have sometimes been coupled
55
with an explicit anti-party attitude . The new
political focus appears to lie on maintaining a basic
consensus that democratic rules should govern
the interactions of those who represent citizens in
the National Congress. The pre-1973 experience
with democracy and the negative experience of the
military dictatorship also appear to have enhanced
general acceptance of basic democratic values
within society. Political participation is less clientfocused and populist than in many other Latin
American countries, and has come closer to the
forms found in Western Europe. Observers note
that popular participation in parties and unions has
decreased, particularly compared to the pre-1973
situation. The existing party system has become
more autonomous and distanced from society and
its people. At the same time is has become an elite
instrument to ensure efficient political decisionmaking.
5.3.1 The Executive
Typical for a Latin American presidential
democracy, Chile’s political system vests
considerable powers in the presidency, and
compared to the presidential system of the US it
allows the Legislature (the National Congress) only
a rather limited role. But despite strong executive
powers, the Chilean presidency and its government
require majorities in the legislature to govern
by democratic legislative processes rather than
executive degrees. Since the political transition in
1990, Chile’s centre-left presidents have depended
on support by the moderate right to get legislative
approval for government policies. In practice
electoral rules, the structure of the legislature and
the distribution of political parties have shaped
how consensus has been forged across the political
spectrum from left to right.
Box 5.1 describes constitutional examples of
executive strength over the National Congress,
prevailing during the 1990s.
5.3.2 The National Congress – the Chamber of
Deputies and the Senate
The Chilean legislature – the National Congress
- consists of two houses, the Chamber of Deputies
and the Senate. This bicameral system had already
been set out in the 1925 Constitution and has been
retained in two constitutional reforms, 1980 and
55 Sperberg, 2003
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56
Box 5.1 Executive strength in Chile
Box 5.2 The Chamber of Deputies and the Senate
Original constitutional provisions of 1980 bar the second
house – the Senate - from exercising oversight of the
executive branch or expressing opinions on the conduct
of government. The constitution of 1980 also severely
limited the role of Congress in legislative matters
relative to earlier legislatures in Chilean history. Article
62 states that “the President of the Republic holds
the exclusive initiative for proposals of law related to
changes of the political or administrative division of the
country, or to the financial or budgetary administration
of the State.” Article 64 of the constitution also restricts
the budgetary prerogatives of the legislative branch.
Constitutional amendments in 1989 at the transition to
democracy removed the provision that bared the Senate
from exercising legislative oversight and also eliminated
the president’s power to dissolve the first house – the
Chamber of Deputies.
In 1980 the Chamber of Deputies has been reduced to 120
members - 2 for each of the 60 congressional districts
– each serving for four years. The Senate has 38 members,
who serve eight-year terms, with half of the body coming
up for election every four years. In contrast to the age
requirement of 20 for deputies, senators must be at least
40 years old. High-level government officials, including
ministers, judges, and the five members of the Central
Bank Council, are barred from being candidates for
deputy or senator until a year after they leave their posts.
Leaders of community groups or other associations also
are not permitted to become candidates unless they give
up their posts.
In several areas the President retains sole authority
to introduce bills. These include measures involving
spending, changes in the duties and characteristics of
public-sector administrative entities, modifications to the
political-administrative configuration of the state, and
initiatives related to collective bargaining. The president
can also call the legislature into extraordinary session,
at which time the legislature can only consider legislative
and treaty proposals introduced by the president. The
president may grant certain initiatives priority status,
requiring that Congress act within three, ten, or thirty
days, depending on the degree of urgency specified. In this
sense, the president has the exclusive power to set the
legislative agenda and, therefore, the political agenda. In
a further restraint on legislators, the 1980 Constitution
permits the Constitutional Tribunal to remove a senator
or deputy from office if he or she “permits the voting of
a motion that is declared openly contrary to the political
constitution of the State by the Constitutional Tribunal”.
Congress is limited in its ability to act as a counterforce
against the President’s power in matters dealing with the
constitutional rights of citizens. Although the President
needs the approval of the majority of Congress to establish
states of siege, the President may declare a state of
assembly, emergency, or catastrophe solely with the
approval of National Security Council (Conesa).
Source: http://www.country-data.com/frd/cs/cltoc.html
1989 respectively. The Chilean legislature looks
back to a long history. In the 19th century it had been
considered one of the strongest legislative bodies in
the world. Limitations to congressional prerogatives
were introduced in 1925 and subsequently
characterized Chile’s political system as one of
Latin America’s strong executive systems. These
limitations included the legislature’s power over
budget laws and giving the President considerable
legislative powers, including the right to designate
particular legislation as ’urgent’.
The Chamber of Deputies carries out its duties by means
of 13 permanent commissions, each composed of 13
deputies. The Senate has 18 commissions, each with
5 members. Most of the commissions correspond to a
ministry responsible for a similar substantive area. Mixed
commissions, composed of members from both houses,
are charged with resolving discrepancies between the
houses on particular pieces of legislation.
However, throughout the first two quarters of
the 20th century, the Chilean Congress remained
a critical arena for the formulation of national
policy. It served as the most important institution
for cross-party bargaining and consensus building
in Chile’s otherwise fragmented political system.
Congress produced fundamental legislation, such
as laws establishing social security (1924), the
Labor Code (1931), the minimum wage (1943),
Corfo (1939), restrictions on the PCCh (1948), and
agrarian reforms (1967). The National Congress has
resumed this role since the return to democracy.
Box 5.2 gives further details on the Chamber of
Deputies and the Senate.
5.3.3 Political Parties and Electoral Rules
The party system that arose after 1990 is the
result of Chile’s political history since the early
1970s and the regulations of the 1980 Constitution.
In the 1960s the practice of coalition building
that previously governed inter-party relations
transformed to that of polarized pluralism which
lead to increased confrontations and culminated in
the military coup in 1973. Although after the return
to democracy the divisions between right, middle
and left parties have remained, there are now more
than three parties competing for votes.
Chile’s bi-nominal electoral system exercises a
significant impact on the party system. It forces
parties to form alliances in order to increase
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case
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Phase
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Findings and recommendations
electoral chances. For small parties this is the
56
only chance to ensure minimal presentation . The
electoral system also favors the second strongest
political power in a constituency, because of the
rule that two candidates from the same party can
only win the second seat in a constituency if their
share of votes exceeds two thirds. This favors the
right-wing opposition. Quite importantly, it provides
incentives for the governing left to seek consensus
with the opposition on the right to enhance the
possibility that legislative proposals can be passed
in the National Congress.
While these incentives may not be considered
positive from the domestic political perspective,
observers note these as important in explaining
57
Chile’s consensual public policy making process .
There have been a number of attempts to change
the Constitution and the electoral system. Until very
recently these have failed, precisely because of the
way political power is shared across the political
spectrum.
However, on September 17th 2005, the Chilean
Congress enacted an amended version of the
previous Constitution, removing what President
Ricardo Lagos called the “authoritarian enclaves”
left in place by the dictatorship in order to
perpetuate the armed forces’ political power after
58
civilian Government was restored . The electoral
system is no longer written into Constitution and
thus will be easier to change in the future. It is yet
too early to say what effect these amendments
will have on policy consensus building across the
broader political spectrum.
5.3.4 The Judiciary
guaranteeing judicial independence. The justice
system is considered one of the best on the South
American continent, despite a serious lack of
resources and inadequate judicial access for poor
citizens.
In the political climate before 1973, the Supreme
Court was viewed as a conservative and inflexible
power, obsessed with a literal definition of a
law designed to protect the privileges of private
property. The Supreme Court, however, rightly saw
its task as following the dictates of the law and not
to change it to suit political objectives. The military
regime left the court system virtually intact. The
courts eventually accepted the legitimacy of the
military junta as the new executive and legislative
power and adjudicated matters in conformity
with the new decree laws, even when the latter
violated the spirit and letter of the Constitution. For
example, human rights violations were deferring to
the military and security services.
Relations between the new democratic Government
and the Supreme Court were initially tense, not
least because the outgoing regime had ensured the
appointment of relatively young and conservative
judges but also because of the Supreme Court’s
complete disregard for human rights violations
under the military Government. Attempts to
introduce constitutional reform legislation in the
early 1990s failed, not achieving the necessary
majority in the Congress again for the institutional
reasons outlined above. Some were concerned
that had these changes gone through, the judicial
system would have become more politicized.
59
5.3.5 Sub-national Government Entities
Chile’s judicial system is based on Roman law and
Spanish and French traditions, particularly the
Napoleonic Code. After independence it acquired
a reputation for independence, impartiality,
and probity, but fell into some disrepute during
the parliamentary republic from 1891 to 1925,
when it became part of logrolling and patronage
politics. The 1925 constitutional reform aimed at
depoliticizing and improving the judicial system by
Since 1990, the Christian Democratic Party and the Socialist Party have
been the main pillars for the governing coalition, the CPD (Concertacion de
Partidos por la Democracia).
57 Siavelis, P (2002): Exaggerated Presidentialism and Moderate Presidents:
Executive-Legislative Relations in Chile; Carey J. (2002): Parties, Coalitions,
and the Chilean Congress in the 1990s.
58 The Economist (2005, September 15th): Democratic at last – Cleaning
up the Constitution; also The Economist (2004 – October 21st): Chile’s new
constitution – untying the knot.
59 This section draws on material from the US Library of Congress.
Chile is organized in 13 administrative regions
from north to south. In the early years of nationstate formation, Chile had adopted a unitary
rather than a federal system. Regional and local
governments have been entities under national
authority and subject to the legislative powers
vested in the central Government. Over the years
local governments have enjoyed varying degrees of
self-determination and autonomy.
56 From the onset Chile’s Constitution catered for
local municipal councils to be elected through
direct popular vote. During much of the nineteenth
century, local governments were barely able to
provide the minimal services they were charged
with, such as the maintenance of public order and
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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58
basic sanitation, given the scarcity of resources.
Towards the end of the century, however, the
country embarked on a bold experiment, providing
significant local autonomy to the nation’s elected
municipalities, many of which flourished under
local leadership with local resources. The center
of gravity of Chilean politics shifted toward local
governments and their allies in Congress.
The 1925 Constitution sought some corrections
to this experiment by increasing the oversight of
local authorities through the creation of elected
provincial assemblies. However, the legislation
that would have made those assemblies a reality
was never adopted. Instead, oversight functions
were turned over to appointed agents of the central
Government. During the dramatic expansion of the
national state in the wake of the Great Depression,
local governments were left behind. The authorities
of the central Government routinely kept tax
revenues, which by law were meant to be returned
to local governments. The essence of local politics
became a struggle to use party and patronage
networks to extract resources on a preferential
basis for local development. As the nation’s
electorate expanded, local government officials
played an increasingly important role as electoral
agents. Mayors and councilors became political
brokers seeking to exchange votes for a water
treatment plant, a stretch of highway, or jobs for
constituents. Elections for local office were as hotly
contested as elections for national office and served
as building blocks of party development.
The military regime viewed the somewhat
fractious state of local politics as proof that
parties and politicians were incapable of efficient
administration. As a result, it designed a system of
local administration distinctly based on corporatism
and heavily dependent on direct appointments
from the center. According to the Constitution of
1980, regional and local governments would be
administered by intendentes and mayors, who
would be appointed directly by the President of
the Republic. The mayors of smaller towns would
be designated by regional councils created to
advise the intendentes. The regional councils
would be formed by employees of state agencies
in the locality, military officers, and designated
representatives of interest groups with no party
affiliation. This conception of regional government
would be extended to the municipal level with
similarly designated local councils.
Although this scheme would make local authorities
highly dependent on appointments from above,
the military Government also took an important
step to decentralize state functions by giving local
administrative units greatly increased resources
and autonomy to make local governments viable. A
notable example was the decision to give municipal
governments far more responsibility for elementary
and secondary education and other local services.
A decentralization process was started halfheartedly at the beginning of the 1980s and has
been maintained since the 1990s. Subsequently,
democratic governments have been concerned with
reintroducing the democratic legitimization of local
political bodies.
Many shared the view that part of the country’s
tradition of elected local governments should be
restored. In November 1991 a constitutional reform
law (changed in 2004) paved the way for municipal
election since June 1992. Local governments are
now formed by a municipal council and a mayor
who serve four-year terms. The mayor is directly
elected and the councilors are elected through a
proportional representation system. Candidates
must be sponsored by registered political parties
that obtained at least 5% of the vote in previous
contests. The number of councilors varies, from six
in smaller municipalities to ten in the larger ones.
The law bars government officials and members
of Congress from running for local office. The
mayor’s responsibility is to propose a communal
plan, a budget, investment programs, and zoning
plans to the municipal council for approval. The
mayor also appoints delegates to remote areas of
the community. The municipal council approves
local ordinances and regulations and oversees
the work of the mayor, being authorized to call
to the attention of the controller general any
irregularities.
Most of the municipal resources come from the
Common Municipal Fund, administered by the
Ministry of Interior. This Fund endeavors to favor
poorer areas in the distribution of resources
for local government. The law on municipalities
also calls for the creation of an economic and
social council in each municipality. This is an
advisory body constituted by representatives of
local, organized groups, including, for example,
neighborhood associations and other social and
voluntary organizations. Municipalities have sole
responsibility for the provision of local public order
and public services and work closely with state
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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Studies
Phase
1 Report Summary
Findings and recommendations
agencies on a host of other matters, including
public health and education. They are authorized to
create administrative units to oversee each of these
activities.
5.3.6 Summary
Although in institutional terms the Chilean politicaladministrative system grants the presidency great
powers, the president still needs majorities without
60
which his scope of activity is limited . This has
applied particularly to the efforts of the Government
to further reform the 1980 Constitution and to
remove the enclaves of authoritarianism. Such has
been achieved only most recently, in September
2005. Until then the paradoxical constellations in
the Chilean presidential system regarding distorted
majorities in both chambers has been such that
the president has depended on the moderate
right. Thus the incentives have been to build broad
based consensus before the executive sought the
Congress to legislate on policies.
In summary, despite the institutional predominance
of the executive on the surface, the legislature has
played a real and important role in Chile’s political
61
processes . This would be overlooked if one merely
considered the formal balance of political power
between the branches of the political system
and neglected the inter-branch connections. The
balance of inter-branch powers has depended not
on the institutional set-up but the party distribution
of seats, the partisan power of each branch of
the political system and the nature and extent of
presidential support in the Congress.
Political observers argue that since the restoration
of democracy, Chile’s presidents have been
able to successfully pursue their legislative
agendas, not because of the extraordinary powers
constitutionally vested on them, but because the
modus operandis has included incentives that
proposed a cooperative style of government, where
the legislature has been influential despite its
superficially limited role. In this practice Chile has
distinguished itself from other Latin American
presidencies, where legislatures have been
perceived as mere ‘rubber stamping’ entities or
even as an impediment to the efficient execution of
economically sensible presidential policies.
5.4 Fiscal Issues, At the National and
Sub-National Level
The third column of the revised governance
taxonomy focused on fiscal issues. The desk based
nature of this country case study has not allow for
a detailed analysis of Chile’s fiscal system at the
national and sub-national level as conducted for the
Ghana, Peru and, to a lesser extent, the Tanzania
case study. It is most important, however, to take
note that Chile does not operate an institutionalized
mechanism of redistributing revenue received from
mining to those regions where mining activities
are undertaken. Instead, sub-national funding
appears to be allocated through the budget process
managed at the central government level. In this,
Chile is distinct from Ghana and Peru, both of whom
practice formula based revenue redistribution
schemes. These appear to be subject to the
politicization of resource allocation and do not
strike to constitute particular efficient systems of
sub-national financial management.
Box 5.3 summarizes the evaluation of Chile’s
aggregate fiscal performance as assessed by the
IMF’s standardized Report on the Observance of
Standards and Codes (ROSC) and the Article IV
Consultations.
5.5 Social Cohesion: Social Tensions,
Conflict Prevention and Conflict Mitigation
The fourth column of the revised governance
taxonomy raises the subject of social cohesion, in
particular, to what extent mining activities raise
social tensions requiring the prevention of conflicts
or their mitigation. In the context of this Chile
study, there are no particular concerns with mining
activities undermining social cohesion. In part this
is explained because many mining operations take
place at considerable distances from communities
and settlements. Furthermore, it would appear
that Chile’s political institutions are well poised
and enjoy sufficient legitimacy to deal with
contentious issues in a democratic manner, which
does not cause the need for conflict prevention
and mitigation outside of the realm of the official
governance system.
5.6 Private Sector Development and Human
Capacity Development
60 61 Jaime Sperberg (2003), page 34.
This conclusion draws on Siavelis (2002)
In accordance with the fifth column of the revised
governance taxonomy, this sub-Section assesses
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60
Box 5.3 Chile’s public financial management system
The 2005 IMF article IV consultation report commend the
Chilean Government on its prudent fiscal policies within
the context of a sound and consistent policy framework.
The 2005 ROSC update stresses a high degree of fiscal
transparency and new initiatives to provide improved
information on extra-budgetary operations.
private sector and human capacity development
issues. Two aspects appear to be of particular
relevance in understanding Chile’s achievements
in poverty reduction and its recent economic
diversification:
●
●
An important element in Chile’s public financial
management system is its structural surplus rule
introduced in 2000. This rule targets a cyclically adjusted
fiscal surplus of 1% of GDP in the public accounts. The aim
is to provide an effective countercyclical stimulus to the
economy, and over the past couple of years this appears
to have worked. Under the rule, the Government saves
all copper revenues from Codelco above a long-term
reference price for copper. Other central government
revenue is smoothed over the business cycle, using an
estimate of potential output. Two independent panels of
experts (each including 12-14 experts) are consulted on
the determination of the respective structural revenue
estimate. The budget law then sets an aggregate central
government expenditure ceiling, which is 1% of GDP below
this structural revenue.
The structural surplus rule has provided a useful tool
for policy making for budget preparation helping to set
revenue targets and expenditure ceilings. Recently, higher
revenue from increases in copper prices have brought
about overall surplus, which have been sterilized and used
selectively to repay public debt. When economic growth is
below trend such as between 2000-2003, the rule allows
the Government to run deficits.
The rule has also increased transparency in aggregate
fiscal policy making. It gets noted, in particular, that in
recent years the rule has brought greater transparency
and discipline to military spending for which transfers
from the Codelco have been earmarked. Initiatives are
said to be under way to further formalize the rule to
improved decision making, for example, on contingent
liabilities such as pension obligations. Although there
are congressional and presidential elections scheduled
for December 2005, there is little doubt that political
consensus on fiscal prudence remains strong.
The annual submission of the budget to Congress is
companied by a Report on Public Finances, specifying in
detail various aspects of public finances. The submission
of this report is required by the country’s Financial
Management Law.
More than ¾ of government entities are linked up to
a financial information management system, which is
expected to be reaching all government entities by early
2006. This system allows close monitoring of actual
expenditure and expenditure commitments. It provides the
basis for good public financial management decisions.
Section 5.6.1 looks at labor market changes; and
Section 5.6.2 summarizes changes in land
ownership and policies and their effect on the
development of commercial farming activities.
5.5.1 Chile’s Labor Markets
Despite the impressive overall reduction in poverty
levels, unemployment has remained an issue
in Chile. Pre 1973, the Trade Unions had been
powerful and maximizing employment had been a
key part of economic strategy, not least by using the
public sector to reduce unemployment. In 1979, the
labor laws were modified in an attempt to increase
flexibility and reduce labor costs as a means to
reduce Union power. In particular, it was seen that
there was to be a trade off between inflation and
employment such that a 1% reduction in inflation
62
increased unemployment by 10% . These changes
led to considerable unemployment and uncertainty
within the labor force. In 1990, the labor laws
were revised again, but this time with the intention
of generating greater stability and certainty for
workers. For example, “non-justified” dismissals
have been prohibited.
Employment increases since the early 1990s have
been an important reason for the reduction of
poverty. The unemployment rate declined from 8.3%
63
in 1990 to about 5.7% in 1996 . However, in times of
crises, employment does suffer. In the 1998 crisis,
unemployment increased from 6.1% in 1998 to over
9% by 2000. Such fluctuations affect, in particular,
the urban poor who are employed in ‘precarious’
working relationships as well as very low incomes
in the informal sector. Compared to other Latin
American countries, however, the size of Chile’s
informal sector is much smaller. This has probably
made efforts to reduce poverty considerably easier
to implement and is also likely to have improved
their effectiveness. Moreover, the relatively small
size of the informal sector allows a broader tax
base with correspondingly less risk of misallocation
effects from taxation measures.
62 63 ILO (2003)
Sperberg, p. 83.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
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Continued growth in the Chilean economy has
meant that unemployment has become much less
of an issue than in earlier periods. Changes to
labor legislation in 2001 were aimed at increasing
the bargaining power of government. In 2002 Chile
was the first country in Latin America to introduce
64
unemployment insurance .
5.5.2 Land Titles and Land Reform
towns as well as better access to schools and other
sources of employment. By the 1980s the rural
population had caught up in universal literacy. Since
the 1990s, Chile has established a visible presence
in various international agricultural export markets.
65
In the past, rural Chilean society was characterized
by large landholdings (latifundios) resulting from
the colonial practice of the Spanish crown to give
land grants to soldiers and the RC church. By the
late 18th century, noble families held the most
important land and bequeathed it to the elder
son. After independence, these land titles were
abolished and new inheritance laws led to the
division of properties and the development of a
market for these. Laborers either lived on the
estate working as needed in exchange for the right
to cultivate and graze on a portion of the land, or
lived in nearly villages and towns were they held
their own small properties.
By the middle of the 20th century much land was
still held in large properties and became the
target of heightened criticism by reformists. In the
1960s and early 1970s a land reform program was
carried out to which the military Government put
an end as soon as it came to govern. In addition to
returning some of the expropriated land, however,
it distributed individual titles to members of the
peasant communities that had benefited from the
previous agrarian reform and permitted the sale
of rural property. This change in policy did not
reconstitute the large landholdings of the period
prior to the agrarian reform, but encouraged an
expansion of medium-sized holdings and a better
distribution of agricultural land. It may be an
important component in explaining the success of
Chile’s agricultural exports in recent years.
Agricultural land use changed to more intensive
production and accelerated the incorporation of
modern technologies. Commercial farming created
a labor market for wage-earning workers living
mainly in town or small rural properties and an
increase in self-employed agricultural workers.
The rural road network was expanded to permit
access to new farms and logging areas, triggering
a response of entrepreneurial activities in smallBertlesmann (2003)
This section lends from the US Library of Congress, http://countrystudies.
us/chile/41.htm
64 65 The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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62
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Conclusions and
Implications
6
6. Conclusions and Implications
64
With respect to macroeconomic management
and policies at the national level, it is not an
exaggeration to say that Chile provides an example
of how to deal with the challenges of dependence
on mineral exports. The following aspects of the
Chilean experience are important:
●
●
●
●
●
●
Since the 1980s, Chile has practiced cautious
and appropriate policies that have allowed the
country to retain macroeconomic balance in
spite of considerable variations in mineral export
revenues and a pronounced boom in mining
investment.
The macroeconomic success has allowed Chile
to achieve export diversification, particularly
into agricultural products, and to reduce its
dependence on copper exports, which is a
significant feat in view of the rapid growth of
mineral exports.
High and broad based economic growth has
resulted in strong employment growth and,
together with government social expenditure,
particularly on housing, this has driven down
poverty levels.
The public sector has benefited from high
revenues from mining, which have allowed the
country to invest in human capital building,
as exemplified by the doubling of government
expenditure on education.
The Copper Stabilization Fund has played
a crucial role in smoothing fluctuations in
government expenditure, thus helping to provide
the steady levels of funding necessary for
sustainable social programs.
At present, Chile is faced with the need to
diversify into more skill and knowledge intensive
industries, particularly since rising real wages
are reducing the country's competitiveness in
labor intensive sectors and the natural resource
based sectors will not generate sufficient
employment; its great advantage is that, with
government revenue from mining expected to
increase considerably in the future, Chile faces
less of a budgetary constraint in raising levels of
expenditure on higher education and research
than other countries at its income level. Chile
should be able to successfully manage the
transition from ‘Latin American problems’ to
‘European problems’.
At the regional level, it is worth emphasizing that
Chile has done without any mechanisms to recycle
government revenues from mining back to the
mining regions. Instead, national government
spending is allocated to regions on the basis of
needs as perceived by the central Government and
this policy appears to be relatively uncontroversial
(although, obviously, the population of mining
districts would prefer to keep a larger share for
themselves). The highly positive economic and
social development in Region II has by and large
come about as a result of strong economic growth,
reinforced by close linkages between the mining
industry and other sectors of the local economy.
These linkages have been promoted by the mining
companies, in particular Escondida, and it is likely
that they would have been considerably weaker
without this active promotion. The efforts to build
linkages do, however, go beyond simply nurturing
suppliers on an individual basis. The mining cluster
in Region II (which, although it is concentrated to
that region is not limited to it) was a joint initiative
by the national Government and the mining
companies in Region II, with Escondida being the
main driving force on the industry side. It has
focused not just on adapting suppliers' practices
to the needs of their Region II customers, but
on raising their competitiveness in international
markets by supporting their efforts to get ISO 9000
and 14000 certification. This is a more long range
strategy than one might normally expect.
The vision for the economic future of Region II
has not been clearly articulated, possibly because
neither the Government nor the companies see any
need for a long-range strategy at the moment. The
question that could be asked is whether Region II
will continue being a mining region or will it have a
more diversified economic structure in the future.
As long as the region continues to attract mining
investment at the present rate, the answer to this
question will have to be postponed.
The problem that was posed at the beginning of
the work on the Resource Endowment initiative
was why some countries navigate safely around
the obstacles to economic development that
face mineral dependent countries while others
capsize. In the case of Chile, an important part
of the answer appears to be an atmosphere of
cooperation and compromise between different
actors in society. This cooperation and compromise
is most important and visible between government
and industry, but also exists with other parts of
civil society, including universities and associations
in crucial supporting roles. The deeper question,
therefore, is whether such an atmosphere can be
replicated in countries that have not been lucky
enough to acquire it by other means.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
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Bibliography
7
65
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Synthesis of four Country
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Phase
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Findings and recommendations
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The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
67
68
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Acknowledgments
8
69
8. Acknowledgments
70
ICMM team
Kathryn McPhail led the initiative under the
direction of John Groom and Paul Mitchell, with
valuable support from Liz Cohen and Victoria
Howse. Guidance was provided by Wayne Murdy,
(Chair, ICMM and Chairman and Chief Executive
Officer, Newmont Mining Corporation), Sir Mark
Moody-Stuart, (Chairman, Anglo American plc), and
Paul Skinner, (Chairman, Rio Tinto plc). The entire
ICMM team thanks all the individuals, governments
and organizations that contributed to the study as
listed below.
Consulting team
The main contributors to this case-study were
Olle Östensson (UNCTAD) and Ian Emsley (Anglo
American). Additional contributions were made by
Evelyn Dietsche (OPM) and Paul Stevens (Professor
of Petroleum Policy and Economics, University
of Dundee. Aidan Davy (independent consultant)
and Daniel Litvin (independent consultant) also
contributed to the case-study.
Country Contributors
Government of Chile, including authorities in
Santiago and Antofagasta and representatives
of local government in Antofagasta; Escondida
management in Santiago and Antofagasta
(including Mauro Valdes and Jorge Zeballos; BHP
Billiton, a 57.5% shareholder in Escondida (Holly
Lindsay); management of the Escondida foundation;
representatives of Escondida labor unions; local
NGOs and community groups; national universities
in Santiago and Antofagasta; representatives of
business associations in Antofagasta, including
representatives of small scale miners association;
representatives of other mining companies; and
suppliers to Escondida.
Country Case Studies Peer Review Team
Glen Armstrong (Sustainable Finance), Aidan
Davy (independent consultant), Kathryn McPhail
(ICMM), Andrew Stoeckel (Centre for International
Economics, Adelaide), Warwick McKibbin (Executive
Director Centre for Applied Macroeconomic
Analysis and Professor of International Economics,
Research School of Pacific & Asian Studies,
Australian National University; Member, Board of
the Reserve Bank of Australia).
(Newmont), Tim Baker (Placer Dome), Britt Banks
(Newmont), Fred Bantubonse (Chamber of Mines
Zambia), Stan Batey (Freeport McMoRan), Roger
Baxter (Chamber of Mines of South Africa), Edward
Bickham (Anglo American), Steven Botts (Compañia
Minera Antamina S.A.), Reinoud Boers (Mining
Industry Associations of Southern Africa), Jim
Cooney (Placer Dome), Nicolas di Boscio (Rio Tinto),
Ian Emsley (Anglo American), Dorothy Gyamfi
(Newmont), Paul Hollesen (AngloGold Ashanti),
Emmanuel Jengo (Chamber of Mines of Tanzania),
Niks Lesufi (Chamber of Mines of South Africa),
Holly Lindsay (BHP Billiton), Helen Macdonald
(Newmont), Greg McNee (Placer Dome), Jim Miller
(Freeport McMoRan), Sixtus Mulenga (Konkola
Copper Mines plc), Richard Ness (Newmont),
Gordon Peeling (Mining Association of Canada),
Dave Rodier (Noranda), Eduardo Rubio (Minera
Quellaveco S.A.).
International Advisory Group
Georg Kell (Executive Head, United Nations
Global Compact Office), Pedro Pablo Kuczynski
(Minister of Economy and Finance, Peru) (until
2005), Hon. Mamadou Lamine Loum (Independent
consultant and former Prime Minister of Senegal),
Warwick McKibbin (Executive Director Centre for
Applied Macroeconomic Analysis and Professor of
International Economics, Research School of Pacific
& Asian Studies, Australian National University;
Member, Board of the Reserve Bank of Australia),
Hon. Felix Mutati (Deputy Minister of Finance and
National Planning, Republic of Zambia), Jane
Nelson (Director, Corporate Social Responsibility
Initiative, Kennedy School of Government, Harvard
University and Director, Business Strategy,
International Business Leaders Forum).
Partners
United Nations Conference on Trade and
Development: Olle Östensson World Bank Group:
Craig Andrews, Clive Armstrong, Kent Lupberger,
Rashad Kaldany, Leo Maraboli, Meg Taylor, Peter
Van der Veen.
ICMM Working Group
John Groom (Chair) (Anglo American), Carlos
Aranda (Southern Peru Copper Corporation), Joyce
Aryee (Chamber of Mines of Ghana), Dave Baker
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Annexes to the Chile
Case STudy
9
71
Annex 1. Additional Tables complementing
Section 3 of the main report
72
9.1 National Statistics
Table 9.3 Destination of Chile’s exports of copper metal in 1998
and 2003, by value, percent of total
Table 9.1 Composition of Chilean mineral exports in
1991 and 2003, by value, percent of total mineral exports
Commodity
1991
2003
Copper in concentrates
18.8
28.7
Copper as metal
62.9
59.6
Gold
8.8
3.4
Iron ore and concentrates
3.4
1.7
Silver
1.3
1.1
Other base metal concentrates
2.2
3.7
Precious metal concentrates
1.2
0.5
Other minerals and metals,
including non-ferrous scrap
1.3
1.3
Source: UNCTAD secretariat calculations, based on national trade
statistics
Destination country
1998
2003
China
3.2
17.9
Italy
12.0
13.1
France
7.2
9.8
Republic of Korea
6.3
9.2
United States
7.8
7.6
Brazil
5.9
5.1
Netherlands
2.8
4.9
Mexico
5.1
3.8
Japan
6.1
2.5
Germany
5.1
2.4
United Kingdom
16.2
2.1
Other countries
22.2
19.6
Source: UNCTAD secretariat calculations, based on national trade
Table 9.2 Destination of Chile’s exports of copper in
concentrates in 1998 and 2003, by value, percent of total
Destination country
1998
2003
Japan
39.2
34.6
China
8.4
15.9
Republic of Korea
3.3
11.3
Germany
7.0
8.1
India
1.9
7.8
Brazil
6.7
Spain
statistics
Table 9.4 Average income by economic activity in Chile,
October-December 2000, Chilean pesos
Men
Women
Total
Total
304’181
209’081
271’393
Agriculture, Fishing
155’064
124’484
151’532
Mining
581’844
341’533
564’641
6.0
Manufacturing
Industries
266’985
168’092
239’563
4.0
3.2
Public Services
641’236
437’707
603’647
Sweden
2.1
2.3
Construction
231’443
517’809
238’028
Canada
4.0
2.1
Commerce
294’195
174’523
239’185
Philippines
2.6
1.7
United States
5.3
0.4
Transportation,
Telecommunications
318’911
239’595
307’398
Peru
4.5
0.1
Financial Services
735’186
318’164
579’084
Other countries
11.1
6.4
Community Services
312’571
218’607
259’612
Source: UNCTAD secretariat calculations, based on national trade
Source : Income Survey. National Statistical Institute
statistics
9.2 Millennium Development Goals – Summary
for Chile
This Sub-Section of Annex 1 summarizes Chile’s
performance with respect to the Millennium
Development Goals (MDGs). The MDGs are depicted
in the box below and thereafter described in further
detail.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case
Studies
Phase
1 Report Summary
Findings and recommendations
Chile’s process towards achieving the MDGs
Goal 1: Poverty – a steady improvement
Target 1 (below $1 a day):
Doing well – already below target by 1996. The only slight qualification is a lack of data from 2001
onwards.
Target 2 (suffer from hunger):
Just under the target after only 10 years for the proportion of the population below minimum level of
consumption. The prevalence of underweight children has not improved by much, however, is already low
(only 1%).
Goal 2: Primary Education – not much improvement, however, from a high standard
Target 3 (complete primary education):
Enrolment in education is only in the late 80’s (percentage) and has not seen any marked improvements.
However the number of students gaining qualifications and being literate has been consistently high
(nearly 100%).
Goal 3: Gender Equality – a moderate improvement
Target 4 (empower women):
Gender disparities within education seem to have been eradicated with girls starting to eclipse the boys!
Share of women in employment has not changed from the mid 30% mark but the number of women in
Parliament has started to increase.
Goal 4: Child Mortality – good progress
Target 5 (reduce it):
Approaching the target steadily.
Goal 5: Maternal Health – good start, but not much improvement recently
Target 6 (improve it):
Almost halved in the first couple of years but is now leveling out. However, there is limited data with
nothing from 2001 onwards.
Goal 6: Disease – lack of data
Target 7 (halted and reversed HIV/AIDS):
No data
Target 8 (halted and reversed other major diseases):
Severe lack of data, although TB seems to have been cut from 8 out of 100,000 of the population to 1.
A relative reduction but it was already very low.
Goal 7: Environmental Sustainability – good progress
Target 9 (“integrate the principles of sustainable development into country policies and programs and
reverse the loss of environmental resources):
Proportion of land covered by forests has fallen but the land area protected to maintain biological
diversity has improved marginally. Energy supply (use) has been up and down since 1990 and there has
been an upward trend for carbon dioxide emissions per capita.
Target 10 (access to drinking water):
Excellent progress – half way to the target (and already quite high – in the 90th percentile)
Target 11 (improve the lives of slum dwellers):
Although the proportion of slums, relative to urban areas has increased marginally, there has been an
improvement from 85% to 92% of those with access to improved sanitation.
OVERALL:
Chile seems to be heading in the right direction and there have been some significant improvements,
especially with regards to the levels of poverty and child mortality.
Some of the areas, where there was not much improvement, tended to be at an initial high level anyway
– for example gender disparity in education.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
73
9.2.1
Millennium Development Goals in Detail
Goal 1: Eradicate Extreme Poverty and Hunger
Target 1: Halve, between 1990 and 2015, the
proportion of people whose income is less than one
dollar a day.
INDICATORS:
(1a) Proportion of population below $1 per day
(TARGET: under 1% by 2015)
(1b) Poverty Gap Ratio [incidence x depth of poverty]
– lack of data
(1c) Share of poorest quintile in national
consumption – lack of data
Goal 2: Achieve universal primary education
Target 3: Ensure that, by 2015, children everywhere,
boys and girls alike, will be able to complete a full
course of primary schooling
INDICATORS:
(3a) Net enrolment ratio in primary education
(TARGET: 100% by 2015)
(3b) Proportion of pupils starting grade 1 who reach
grade 5 (TARGET: 100% by 2015)
(3c) Literacy rate of 15-24 year olds (TARGET: 100%
by 2015)
TARGET 3: Ensure that by 2015, children everywhere, boys and girls alike,
will be able to complete a full course of primary schooling
TARGET 1: Halve between 1990 and 2015,
the proportion of people whose income is less than one dollar a day
Percentage
6
PROPORTION OF POPULATION BELOW $1 PER DAY
5
4
50
40
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: United Nations, Millennium Development Goals Indicators
NOTE: 1(b) and 1(c) excluded due to lack of data
Target 2: Halve, between 1990 and 2015, the
proportion of people who suffer from hunger.
INDICATORS:
(2a) Prevalence of underweight children (under-five
years of age). (TARGET: under 5.4% by 2015)
(2b) Proportion of population below minimum level
of dietary energy consumption (TARGET: under 21%
by 2015)
TARGET 2: Halve between 1990 and 2015,
the proportion of people who suffer from hunger
9
PREVALENCE OF UNDERWEIGHT CHILDREN (under-five years of age)
8
Linear (TARGET - PROPORTION OF POPULATION BELOW MINIMUM LEVEL OF DIETARY ENERGY CONSUMPTION)
5
60
10
1
6
70
20
2
7
80
30
3
0
MDG TARGET
90
MDG TARGET for 2015
"Poverty Gap Ratio" and "Share of Poorest
Quintile in National Consumption have been
NET ENROLMENT RATIO IN PRIMARY EDUCATION
PROPORTION OF PUPILS STARTING GRADE 1 WHO REACH GRADE 5
LITERACY RATE OF 15-24 YEAR OLDS
100
Percentage (%)
7
Percentage
74
PROPORTION OF POPULATION BELOW MINIMUM LEVEL OF DIETARY ENERGY CONSUMPTION
Linear (TARGET - PREVALENCE OF UNDERWEIGHT CHILDREN (under-five years of age))
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: United Nations, Millennium Development Goals Indicators
Goal 3: Promote Gender Equality and Empower
Women
Target 4: Eliminate gender disparity in primary and
secondary education preferably by 2005 and to all
levels of education no later than 2015
INDICATORS:
(4a) Ratio of girls to boys in primary, secondary and
tertiary education (TARGET: to reach 1 by 2015)
(4b) Ratio of literate females to males of 15-24 year
olds (TARGET: to reach 1 by 2015)
(4c) Share of women in wage employment in the
non-agricultural sector (TARGET: to reach 50% by
2015)
(4d) Proportion of seats held by women in national
parliament (TARGET: to reach 50% by 2015)
Due to lack of data:
(1) "Reds" Target from 1994
(2) "Blues" Target from 1991
4
3
2
1
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: United Nations, Millennium Development Goals Indicators
NOTE: The target for the “prevalence of underweight children” is from
1994. The target for the “proportion of population below minimum level of
dietary consumption is from 1991.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case
Studies
Phase
1 Report Summary
Findings and recommendations
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
SECONDARY
RATIO OF LITERATE FEMALES
TO MALES OF 15-24 YEAR OLDS
MDG TARGET
Maternal Mortality Rate (per 100,000 births)
Ratio of Female to Males
PRIMARY
70
60
MATERNAL MORTALITY RATIO
MDG TARGET (Reduce the 1990 level by 3/4's for 2015)
50
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
75
TARGET 6 : Reduce by three-quarters,
between 1990 and 2015 the maternal mortality rate
TARGET 4: Eliminate gender disparity in primary and secondary education
preferably by 2005 and to all levels of education no later than 2015 - 4(a) and 4(b)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: United Nations, Millennium Development Goals Indicators
Source: United Nations, Millennium Development Goals Indicators
GOAL 4: Reduce Child Mortality
Goal 6: Combat HIV/AIDS, Malaria and other
diseases
Mortality Rates (deaths per 1000 live births)
TARGET 5: Reduce by two-thirds, between 1990 and 2015
the under-five mortality rate
20
18
16
UNDER-FIVE MORTALITY RATE
INFANT MORTALITY RATE
MDG TARGET (UNDER-FIVE MORTALITY RATE - 2/3'S OF 1990 LEVELS BY 2015)
MDG TARGET (2/3'S OF 1990 LEVEL BY 2015)
14
12
10
8
6
4
2
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: United Nations, Millennium Development Goals Indicators
Target 7: Have halted by 2015, and begun to
reverse, the spread of HIV/AIDS
(7a) HIV prevalence among 15-24 year old pregnant
women – lack of data
(7b) Contraceptive prevalence rate
(7c) Number of children orphaned by HIV/AIDS
– lack of data
NOTE: 7(a) 7(b) and 7(c) excluded due to lack of data
Target 8: Have halted by 2015, and begun to
reverse, the incidence of malaria and other major
diseases
(8a) Prevalence of death rates associated with
malaria – lack of data
(8b) Proportion of population in malaria risk areas
using effective malaria prevention and treatment
measures – lack of data
(8c) Prevalence and death rates associated with
tuberculosis
(8d) Proportion of TB cases detected and cured
under DOTS (Directly Observed Treatment Short
Course)
NOTE: 8(a), 8(b) and 8(d) excluded due to lack of data
Target 6: Reduce by three-quarters, between 1990
and 2015, the maternal mortality ratio
INDICATORS:
(6a) Maternal mortality ratio (TARGET: reach only 70
deaths per 100,000 live births by 2015)
(6b) Proportion of births attended by skilled health
personnel – no verifiable target
NOTE: 6(b) excluded due to lack of suitable target
Prevalence Rate per 100,000 of the Population
Goal 5: Improve Maternal Health
TARGET 8: Have halted by 2015, and begun to reverse,
the incidence of malaria and other major diseases
9
8
7
6
5
4
3
2
1
0
PREVALENCE OF TUBERCULOSIS
PROPORTION OF TB CASES DETECTED AND CURED UNDER DOTS
(Directly Observed Treatment Short Course)
1.2
1
0.8
0.6
Percentage
Target 5: Reduce by two-thirds, between 1990 and
2015, the under-five mortality rate
INDICATORS:
(5a) Under-five mortality rate (TARGET: To get
below 26.4 deaths per 1000 live births by 2015)
(5b) Infant mortality rate (TARGET: To get below 20
deaths per 1000 live births by 2015)
(5c) Proportion of 1 year-old children immunized
against the measles – no verifiable target
5(c) excluded due to lack of suitable target
0.4
0.2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
0
Source: United Nations, Millennium Development Goals Indicators
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
GOAL 7: Ensure Environmental Sustainability
Target 9: Integrate the principles of sustainable
development into country policies and programs
and reverse the loss of environmental resources
(9a) Proportion of land area covered by forest – no
verifiable target
(9b) Land area protected to maintain biological
diversity
(9c) GDP per unit of energy use (as proxy for energy
efficiency)
(9d) Carbon dioxide emissions (per capita)
Target 10: Halve by 2015, the proportion of people
without sustainable access to safe drinking water
(10a) Proportion of population with sustainable
access to an improved water source
TARGET 9: Integrate the principles of sustainable development into country policies
and programmes and reverse the loss of environmental resources - 9(a) and 9(b)
21.2
0.145
21
0.14
20.8
0.135
20.6
0.13
20.4
0.125
Protected Area
Ratio to Surface Area
LAND AREA PROTECTED TO MAINTAIN BIOLOGICAL DIVERSITY
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
Forested Land as a Percentage
of Land Area
PROPORTION OF LAND AREA COVERED BY FOREST
Source: United Nations, Millennium Development Goals Indicators
TARGET 9: Integrate the principles of sustainable development
into country policies programmes and
reverse the loss of environmental and resources - 9(c) and 9(d)
GDP PER UNIT OF ENERGY USE
MDG TARGET (Halve the % of people without sustainable access to water by 2015)
100
95
90
85
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
19
00
20
01
20
02
20
03
20
04
20
Percentage of the Population with Sustainable Access to Drinking Water - both Rural and Urban
Source: United Nations, Millennium Development Goals Indicators
Target 11: By 2020, to have achieved a significant
improvement in the lives of at least 100 million
slum dwellers
(11a) Proportion of people with access to improved
sanitation
(11b) Proportion of people with access to secure
tenure
TARGET 11: By 2020, to have achieved a significant improvement in the lives
of at least 100 million slum dwellers - 11(a) and 11(b)
Slum Population as % of Urban (Secure Tenure Index)
Proportion of People with Access to Improved Sanitation
100
90
80
70
60
50
40
30
20
10
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: United Nations, Millennium Development Goals Indicators
200
6
199
7
199
8
199
199
199
199
PROPORTION OF POPULATION WITH SUSTAINABLE ACCESS TO AN IMPROVED WATER SOURCE
2
0
199
9
200
0
200
1
140
3
199
4
199
5
2
2
4
160
1
6
180
TARGET 10: Halve, by 2015, the proportion of people
without sustainable access to safe drinking water - 10(a)
Metric Tonnes of
CO2 per capita
CARBON DIOXIDE EMISSIONS (PER CAPITA)
200
199
0
Energy Supply
(Kg per $1000 ppp)
76
Source: United Nations, Millennium Development Goals Indicators
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
2006
Annex 2. Chile’s Performance on Governance
Indicators
10.1 Governance Performance in Recent Years
During the course of the 1990s the international
community has put increasing emphasis on
the quality of ‘governance’ as an independent
variable that explains cross-country differences
in socio-economic outcomes. In the context
of the ‘resource curse’ hypothesis, a number
of quantitative studies have suggested that
improved governance structures and institutions
correlate with better development outcomes.
Researchers have made use of indicators on the
quality of governance reported by a number of
survey institutes, think tanks, non-governmental
organizations and international organizations and
compiled on the basis of perceptions gathered
from a large number of enterprises, citizens and
expert survey respondents. This Annex reports
on the quality of governance in Chile compared to
other Latin American countries, as measured by
the WB Governance Indicators and the UNU World
Governance Survey. These indicators would most
likely appear in the governance conditionality that
the Extractive Industries Review (EIR) proposed.
10.2 The World Bank Governance Indicators
Since the late 1990s, the World Bank has compiled
six governance indicators, which combine several
hundred individual variables measuring governance
perceptions (see http://web.worldbank.org). They
draw on data from 25 separate sources compiled
by 18 different organizations. The six indicators
measure three dimensions of governance (two for
each):
●
●
The first dimension measures the process by
which governments are selected, monitored and
replaced. The indicator ‘Voice and Accountability’
refers to the extent by which citizens of a
country are able to participate in the selection of
governments and also measures various aspects
of the political process, civil liberties and political
rights. ‘Political Stability and Absence of Violence’
measures perceptions of the likelihood that the
government in power will be destabilized or
overthrown by possibly unconstitutional and/or
violent means.
The second dimension measures the capacity
of the government to effectively formulate
and implement sound policies. ‘Government
Effectiveness’ summarizes perceptions of the
quality of public service provision, the quality
of the bureaucracy, the competence of the civil
servants, independence of the civil service
from political pressures, and credibility of
the Government’s commitment to policies.
‘Regulatory Quality’ focuses on the policies
themselves including the extent to which the
government intervenes in the market (wage/
price controls, trade barriers, import/export
regulations).
●
The third dimension summarizes the respect of
citizens and the State for the institutions that
govern their economic and social interactions.
‘Rule of law’ measures the extent to which
agents have confidence in and abide by the
rules of the society. These include perceptions
of the incidence of violent and non-violent
crime, the predictability of the judiciary and
the enforceability of contracts. Finally, ‘Control
of Corruption’ measures the perception of
corruption defined as the exercise of public power
for private gain. According to the framework,
the presence of corruption represents a lack of
respect for and legitimacy of formal institutions
and thus governance failure.
These composite Governance Indicators measure
in numerical values from –2.5 (worst) to +2.5 (best)
and are subject to margins of error, which are
clearly indicated. It is stressed that the indicators
are indicative and should not be used to infer
precise country rankings.
Figure 10.1 and Table 10.1 depict Chile’s values
from 1996 to 2004.
Figure 10.1 Chile’s Governance Indicators from 1996 to 2004
2.5
2
Voice and Accountability
1.5
Political Stability
Government
1
Effectiveness
Regulatory Quality
0.5
Rule of Law
0
Control of Corruption
-0.5
1996
1998
2000
2002
2004
Source: http://web.worldbank.org
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77
Table 10.1 Chile’s Governance Indicators from 1996 to 2004
Voice and
and Accountability
Accountability
Voice
Political Stability
Stability
Political
Government Effectiveness
Effectiveness
Government
Regulatory Quality
Quality
Regulatory
Rule of
of Law
Law
Rule
Control of
of Corruption
Corruption
Control
1996
1996
0.93
0.93
1998
1998
0.65
0.65
2000
2000
0.56
0.56
2002
2002
1.07
1.07
2004
2004
1.09
1.09
0.75
0.75
1.2
1.2
0.61
0.61
1.41
1.41
0.85
0.85
1.34
1.34
1.03
1.03
1.26
1.26
0.89
0.89
1.27
1.27
1.52
1.52
1.26
1.26
1.22
1.22
1.27
1.27
1.38
1.38
1.31
1.31
1.48
1.48
1.24
1.24
1.62
1.62
1.16
1.16
1.28
1.28
1.2
1.2
1.56
1.56
1.53
1.53
1.44
1.44
Source: http://web.worldbank.org
With the caveat that the statistical compilation of
the WB Governance Indicators does not support a
precise ranking of countries, Table 10.2 shows the
aggregate governance values for Latin American
and Caribbean countries with Chile at the top.
Figure 10.3 Chile and Peru compared, 1996 and 2004
2
Figure 10.2 Chile compared to Latin American averages
Rule of Law
Control of
Corruption
-0.5
-1
-1.5
Source: http://web.worldbank.org
Comparison with regional average (Latin America) (lower bar) Country’s Percentile Rank (0-100)
Source: D. Kaufmann, A. Kraay and M. Mastruzzi 2005: Governance
Matters IV: Governance Indicators for 1996-2004 (http://www.worldbank.
org/wbi/governance/pubs/govmatters4.html)
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
rru rol
pt of
io n
w
Regulatory
Quality
0
Chile 2004
nt
Government
Effectiveness
0.5
Chile 1996
Co
Political
Stability
Peru 2004
La
Voice and
Accountability
1
Peru 1996
Co
CHILE (2004)
1.5
of
With regard to the respect of citizens and the State
for the institutions that govern their economic and
social interactions, one of the indicators - “Control
of Corruption” - showed an improvement from
1998 to 2000, almost in parallel to that of “Political
Stability”. Whilst there is a slight deterioration
Figure 10.2 below indicates that Chile’s governance
structures deliver much better results than all
other countries in the Latin American region.
This is particularly true with regard to the respect
of citizens and the State for the institutions that
govern their economic and social interactions.
Chile’s lead is smallest for the process by which
governments are selected, monitored and replaced.
le
The two indicators measuring the capacity of
government to effectively formulate and implement
sound policies do not show much variation over the
eight-year period. However, they appear to mirror
each other: “Government Effectiveness” improves
when “Regulatory Quality” deteriorates, and vice
versa.
thereafter, over the eight-year period, this indicator
improved most strikingly, together with “Voice and
Accountability”. The only indicator that deteriorated
over the eight-year period is the “Rule of Law”.
Ru
The data shows that during the late 1990s there
was a slight deterioration regarding the two
indicators that relate to the process by which
governments are selected, monitored and replaced
(“Voice and Accountability” and “Political Stability
and Absence of Violence”). However, both indicators
improved by 2002 and remained nearly unchanged
in 2004.
Vo
Ac ice
co an
un d
ta
bil
ity
Po
liti
ca
lS
ta
bil
ity
Go
Ef ver
fe nm
cti e
ve nt
n
Re ess
gu
l
a
Qu tor
ali y
ty
78
Synthesis of four Country
Case
Studies
Phase
1 Report Summary
Findings and recommendations
79
Table 10.2 Chile compared to other Latin American
Country
Population
(million)/1
Voice and
Accountability
Political
Stability
Government
Effectiveness
Regulatory
Quality
Rule of
Law
Control of
Corruption
Governance
Totals/2
Chile
15.8
1.09
0.89
1.27
1.62
1.16
1.44
7.47
Puerto Rico
3.9
1.02
1.07
1.05
0.75
0.74
0.88
5.51
Costa Rica
4.0
1.11
0.98
0.49
0.67
0.57
0.78
4.60
Uruguay
3.4
1.00
0.49
0.52
0.30
0.42
0.50
3.23
Trinidad and
Tobago
1.3
0.49
0.04
0.47
0.61
0.17
0.02
Panama
3.0
0.54
0.29
0.01
0.22
-0.04
-0.06
0.96
Mexico
102.3
0.36
-0.13
-0.02
0.55
-0.26
-0.27
0.23
Brazil
176.6
0.34
-0.13
0.02
0.19
-0.21
-0.15
0.06
Jamaica
2.6
0.54
-0.28
0.13
0.15
-0.32
-0.52
-0.30
El Salvador
6.5
0.26
-0.23
-0.22
0.56
-0.34
-0.39
-0.36
Dominican
Republic
8.7
0.27
-0.01
-0.46
-0.28
-0.54
-0.50
-1.52
Nicaragua
5.5
0.06
-0.15
-0.71
-0.15
-0.65
-0.34
-1.94
Argentina
38.4
0.49
-0.24
-0.33
-0.81
-0.71
-0.44
-2.04
Peru
27.2
-0.04
-0.68
-0.58
0.17
-0.63
-0.35
-2.11
9.0
-0.01
-0.65
-0.63
0.05
-0.55
-0.78
-2.57
Honduras
7.0
-0.02
-0.69
-0.68
-0.33
-0.61
-0.71
-3.04
Colombia
44.4
-0.47
-1.69
-0.18
-0.12
-0.70
-0.16
-3.32
Guatemala
12.3
-0.39
-0.85
-0.87
-0.07
-0.96
-0.74
-3.88
Ecuador
13.0
-0.19
-0.83
-0.85
-0.60
-0.71
-0.75
-3.93
Paraguay
5.6
-0.23
-0.71
-1.07
-0.60
-0.99
-4.69
Bolivia
1.09
Cuba
11.3
-1.88
0.18
-0.47
-1.81
-1.12
-0.62
-5.72
Venezuela
25.6
-0.46
-1.10
-0.96
-1.24
-1.10
-0.94
-5.80
8.4
-1.50
-1.87
-1.90
-1.11
-1.66
-1.49
-9.53
Haiti
Grey-shaded countries are mining countries as defined in the ICMM Phase 1 Report
/1 Countries with less than 1Mio inhabitants and associated countries (i.e. Guadeloupe, Martinique, Virgin Islands) have not been incuded
/2 Sum of five governance indicators
http://web.worldbank.org
Figure 10.3 shows a comparison of Chile with Peru.
In 1996, Chile outperformed Peru most clearly
with regard to the process by which governments
are selected, monitored and replaced (‘Voice and
Accountability’, ‘Political Stability and Absence of
Violence’). By 2004 Peru caught up in this area.
But Chile’s lead in the respect of citizens and the
State for the institutions that govern their economic
and social interactions (‘Rule of law’, ‘Control of
Corruption’) has become even more pronounced.
The discrepancy between the two countries has
also increased with regard to the capacity of the
Government to effectively formulate and implement
sound policies (‘Government Effectiveness’,
‘Regulatory Quality’).
10.3 UNU World Governance Survey
As an alternative approach, the UNU World
Governance Survey proposes a political process
approach to measure operational rules in use.
The survey currently covers 16 countries, including
the three Latin American countries: Chile; Peru;
and Argentina. The underlying UNU definition of
governance focuses on the formal and informal
rules of the political game. These constitute the
framework within which political processes take
shape. Table 10.3 shows how the UNU methodology
divides the political process into six institutional
‘arenas’.
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80
10.3 Functional dimensions of Governance and their institutional arenas
Process
Dimension
Institutional Arena Purpose of Rules
Socializing
Civil society
The shape the way citizens become aware of and raise issues in public.
Aggregating
Political society
To shape the way issues are combined into policy by political institutions.
Executive
Government
To shape the way policies are made by government institutions.
Managerial
Bureaucracy
To shape the way policies are administered and implemented by public
servants.
Regulatory
Economic society
To shape the way state and market interact to promote development.
Adjudicatory
Judicial system
To shape the setting for resolution of disputes and conflicts.
Source: Court, J. et al (2004)
●
●
●
●
●
●
Civil Society is the arena that links the smallest
social units (i.e. families, communities) to
the State. It is where values are formed and
expressed and where interests are articulated.
Political Society defines the area where citizens
are represented and their views are aggregated
into specific policy demands and proposals. The
key components of political society are parties,
electoral systems, national, sub-national or local
authorities and the Legislature. The legitimacy of
the political society depends to a great extent on
the credibility of individual legislators.
Government in terms of the Executive is
responsible for taking policy decisions and for
establishing a political climate that ensures peace
and security. This includes the relationship with
the military, the prevention of extreme poverty
and efficient management of the civil service.
Bureaucracy is the administrative machinery
that implements policies. It participates in
formulating policies, implementing these and
delivery of public goods and services. Important
aspects in this arena include the recruitment of
civil servants, their accountability and decisionmaking processes within the bureaucracy.
Economic Society describes the state-market
relations. This includes the norms and
institutions that regulate how enterprises and the
self-employed operate, how property is owned
and protected, how capital transactions take
place and how trade is conducted.
The Judiciary covers conflict and dispute
resolution within the private sector and between
private and public entities. This arena includes
the rule of law but also affects informal
mechanisms of conflict resolution.
The World Governance Survey is based on
questionnaires completed by a wide spectrum of
country representatives. It poses five questions
in each of the six arenas, as summarized in Table
10.4 . Respondents rate the specific issue using a
5-point response scale: very high, high, moderate,
low, or very low. The index ranges from a minimum
of 5 to a maximum of 25 points for each of the 6
governance areas. Table 10.5 shows the results for Chile (highlighted)
and Peru and Argentina.
Chile leads the three Latin American countries in
all six governance arenas. It has also improved
its performance in all aspects from 1996 to 2000.
The most noticeable improvements appear to have
been taken place with regard to the Judiciary,
the Government and Civil Society. In particular,
there has been a reduction of discrimination in
politics (DIPO) and greater subordination of the
military to the civilian government (MISU). In
1996 respondents were least confident about the
Judiciary, whilst in 2000 it is the Bureaucracy that
is most lagging behind. Interestingly, respondents
feel most confident about Economic Society where
Chile’s lead position has been unrivalled, both in
1996 and in 2000.
Comparison with Peru shows that absolute
improvements in Peru have been much greater.
Peru has particularly caught up with regard to
Political Society and with Bureaucracy. In the latter,
Chile appears to have been most stagnant. In 1996
Chile had superseded Peru most noticeably in the
extent to which there was competition for political
power (COPP), in government’s commitment to
peaceful resolution of internal conflicts (PRIC) and
in the legislature’s impact on policy content (LEFU).
However, in 2000 the discrepancies are greatest
with regard to citizens’ respect for the system of
rule-making (CIRE), clarity in judicial decisionmaking processes (DMJS) and public officers’
promotion of property rights (PRPR).
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Synthesis of four Country
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Phase
1 Report Summary
Findings and recommendations
81
Table 10.4 Governance arenas, data codes and questions
Arena
Questions and codes
Civil Society
FREX: To what extent do citizens have the freedom of expression?
FPAA: To what degree do citizens have the freedom of peaceful assembly and association?
DIPO: To what extent is there discrimination in politics?
GFPD: To what extent do governments facilitate public discussion on major shifts in policy?
CIRE: To what extent to citizens respect the system of rule-making?
Political
Society
LREP: To what extent is the legislature representative of society?
COPP: To what degree is there real competition for political power?
PUPR: To what extent does the policy-making process fairly reflect public preferences?
LEFU: To what extent does the legislative function affect policy content?
LEAP: To what extent are legislators accountable to the public?
Executive
PSEC: To what extent is the government committed to ensuring the personal security of citizens?
STOL: To what extent is the government committed to ensuring an adequate standard of living for citizens?
NATI: To what extent are leaders encouraged to make tough decisions that are in the national interest?
MISU: To what extent does the military accept its subordination to a civilian government?
PRIC: To what extent is the government committed to peaceful resolution of internal conflicts?
Bureaucracy
HICS: To what extent are higher civil servants part of the policy-making process?
MEBA: To what extent is there a merit-based system for recruitment into the civil service?
ACCO: To what extent are civil servants accountable for their actions?
DEPR: To what extent are there clear decision-making processes in the civil service?
EAPS: To what extent is there equal access to public services?
Economic
Society
PRPR: To what extent do persons in public office promote respect for property rights?
REFI: To what extent are economic regulations applied equally to firms in the economy?
COTR: To what extent is obtaining a business license associated with corrupt transactions?
CPPP: To what extent is there consultation on policy between public and private sector actors?
GLTR: To what extent does government take the new rules of global trade, finance, and technology flows into
account when formulating policy?
Judiciary
JUCI: To what extent is there equal access to justice for citizens?
DMJS: To what extent are there clear decision-making processes in the judicial system?
JUOA: To what extent are judicial officials accountable for their actions?
ILHR: To what extent are international legal norms in the human rights field being incorporated into
NJPC: To what extent are non-judicial processes in place for fair resolution of conflicts?
Source: Court, J. et al (2004)
1996
Argentina
Chile
Peru
1996
Argentina
Chile
Peru
2000
Argentina
Chile
Peru
2000
Table 10.5 The World Governance Survey for Chile, compared with Peru and Argentina
Argentina
Chile
Peru
Civil Society
FREX5 FPAA5 DIPO5 GFPD5 CIRE5
3.89
4.43
3.00
1.77
2.46
3.37
4.10
2.57
2.53
3.77
2.05
2.89
3.16
1.65
1.77
Bureaucracy
HICS5 MEBA5 ACCO5 DEPR5 EAPS5
2.83
1.63
2.03
1.80
2.57
3.03
2.43
2.63
2.87
3.20
2.76
2.14
1.84
1.68
2.57
Civil Society
FREX FPAA DIPO GFPD CIRE
3.97
4.49
2.77
1.86
2.43
3.70
4.27
3.43
2.87
3.60
3.43
4.05
3.19
2.81
1.97
Bureaucracy
HICS MEBA ACCO DEPR EAPS
2.94
1.70
2.11
1.86
2.77
3.00
2.47
2.83
2.93
3.37
3.00
2.16
2.54
2.14
2.65
sum
15.5
16.3
11.5
sum
10.9
14.2
11.0
sum
15.5
17.9
15.5
sum
11.4
14.6
12.5
Political Society
LREP5 COPP5 PUPR5 LEFU5 LEAP5
2.14
3.46
2.21
2.36
2.20
2.70
3.63
2.77
3.30
2.30
1.92
1.92
2.24
1.76
1.46
Economic Society
PRPR5 REFI5 COTR5 CPPP5 GLTR5
2.74
2.17
1.83
3.13
3.56
3.83
3.77
3.77
3.25
3.98
2.84
2.59
2.62
1.97
3.11
Political Society
LREP COPP PUPR LEFU LEAP
2.17
3.51
2.33
2.77
2.20
2.73
3.93
2.83
3.40
2.40
2.27
3.46
2.84
3.27
2.00
Economic Society
PRPR REFI COTR CPPP GLTR
2.74
2.36
1.91
3.16
3.54
3.87
3.83
3.80
3.50
4.18
2.70
2.78
2.88
2.41
3.16
sum
12.4
14.7
9.3
sum
13.4
18.6
13.1
sum
13.0
15.3
13.8
sum
13.7
19.2
13.9
Government
NATI5 MISU5 PRIC5
2.41
4.17
3.77
2.70
2.43
3.93
2.57
1.59
2.35
Judiciary
JUCI5 DMJS5 JUOA5 ILHR5 NJPC5
2.43
2.01
1.99
3.51
2.77
2.50
2.50
2.63
3.13
2.43
1.46
1.43
1.49
1.70
2.16
Government
PSEC STOL NATI MISU PRIC
2.69
2.66
2.40
4.23
3.89
3.70
3.63
2.87
3.20
4.20
3.03
2.64
2.51
2.97
3.38
Judiciary
JUCI DMJS JUOA ILHR NJPC
2.43
2.16
2.21
3.80
2.91
2.67
3.00
3.03
3.70
2.67
1.92
1.78
2.05
3.68
2.68
PSEC5 STOL5
2.60
2.51
3.43
3.33
2.22
2.54
sum
15.5
15.8
11.3
sum
12.7
13.2
8.2
sum
15.9
17.6
14.5
sum
13.5
15.1
12.1
Source: Court, J. et al (2004)
Note: The maximum score on the sums in the Table is 25.
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82
It is striking that in all three Latin American
countries the Bureaucracy and the Judiciary remain
the weakest aspects of governance. There is only
one specific area where Peru is slightly better off
than Chile, namely in non-judicial processes for
conflict resolution.
10.4 Conclusions
Chile unambiguously leads the region in terms of
standard measures for the quality of governance.
It would appear that the country has been better
governed than any of the other Latin American
countries. However, data on governance indicators
has only been collected for a short period of time
– barely eight years. Thus the indicators can only
suggest that Chile has been well governed since the
second half of the 1990s. Indicators do not explicate
how Chile managed to achieve this performance in
the first place.
Taking into account Chile’s contemporary political
history summarized in Annex 3, it is plausible to
assume the following:
●
●
●
undermining the economic and administrative
basis on which the former regime had rested.
This has helped Chile to avoid falling back into a
vicious cycle of opposing interest groups fighting
over particularistic stakes within the context of
the democratic process, leading to collectively
undesirable outcomes. It would appear that this
is what distinguishes Chile’s economic and social
success. If this logic holds true, the key question
is what governance structures and processes have
allowed Chile to follow this path and to overcome
the collective action problems that other countries
typically face. And, in the context of this initiative on
mining, the next question is how this has impinged
on the transmission links between the presence
of and revenue mining activities and the social and
economic benefits that citizens have gained.
In summary, governance indicators tell us
little about the socio-political processes that
have allowed Chile this head start (for example
compared to its neighbor Peru), but the crosscountry comparison helps to raise the important
questions. For answers, it requires further probing
into governance structures and processes.
Had indicators been compiled for earlier periods,
Chile’s performance on the process by which
governments are selected, monitored and
replaced would have looked much worse until
the democratic transition in 1990. Therefore,
significant improvements for this governance
dimension must have been achieved in the early
1990s.
The same logic is plausible with regard to
the respect of citizens and the State for the
institutions that govern their economic and social
interactions. That is, if respect is considered a
voluntarily rather than coerced action.
Substantial improvements to the capacity of
the government to effectively formulate and
implement sound policies are more likely to have
been achieved prior to the early 1990s. Chapters
3 and 4 of the main report would suggest that
improvements in this area have preceded the
democratic transition. Furthermore, building
economic power and administrative capacity
are likely to have been of great importance for
backing the political power of the authoritarian
Pinochet Regime.
Chile’s most impressive achievement would
appear to have been that the political transition at
the end of the 1990s managed to fundamentally
improve political rights and accountability without
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Annex 3. Brief Political History of Chile
11.1 Introduction
Chile’s political history looks back to a democratic
tradition of nearly two centuries. This tradition was
interrupted only twice: first, there was a short spell
of authoritarian rule in the 1920s and second, the
military Government of General Pinochet, which
lasted about 16 years from 1973 to 1989. Over
this period the country had been governed by 3
different constitutions. The first Constitution lasted
until 1925 and set out a parliamentary system with
limited suffrage. The second Constitution in place
since 1925 was replaced in 1980 by the military
Government. The third Constitution of 1989 was
built on a partial reform of the 1980 Constitution
and prepared for the transition to democracy.
This Annex 3 provides a brief overview of Chile’s
political history. It explains that Chile’s economic
success since the restoration of a civic government
has been traced less to the particular institutional
features of its presidential system of government
then to the consensus-building incentives inherent
to the policy process. The literature suggests that
it is this constellation that has encouraged that
legislative decisions enjoy majority support and that
public policies can be implemented effectively.
11.2 From Independence Until the 1930s
66
Chile first attempted to gain independence from
Spanish colonial rule in 1810. But it required
combined forces with Argentina to finally drive
out the Spanish army and declare independence
in 1818. By the end of the nineteenth century the
Chilean National Congress was considered one
of the strongest legislative bodies in the world.
Mirroring developments in Europe and the United
States, politics in Chile during the 19th century was
characterized by conflict between supporters of a
parliamentary model and the defenders of a strong
presidential regime. The parliamentary model
dominated until 1920.
Three parties represented the land-holding
oligarchy and the newly emerging urban classes.
These three parties fought for their interests in
Parliament. They included:
●
The Conservative Party, whose social basis
included large estate owners, banks and
the Catholic clergy. Its objective was the
This chapter lends substantially from a review of Chile’s political history
by Jaime Sperberg in Berg-Schlosser and Kersting (2003), Poverty and
Democracy, Zen books.
66 ●
●
centralization of political power and the
prevention of secularization.
The Liberal Party was backed by mine owners,
business people and a few landowners. Apart
from the issue of secularization, its political and
economic views did not differ much from those of
the Conservative Party.
The National Party represented high level
bureaucrats as well as banks, trade and industry
and formed alliances with both liberal and
conservative forces.
High revenue obtained from taxing the export of
raw material allowed the State early on to invest in
physical and social infrastructure and to become
relatively autonomous and insulated from oligarch
interests. This relative independence, coupled
with a limited role of the military, allowed for the
enhancement of the political sphere and peaceful
conflict resolutions.
After a short period of military rule (1924-1925)
a new Constitution came into force in 1925,
establishing a strong presidential system of
government typical for Latin America. Important
changes in the social structure took place in
the early years of the 20th century. Against the
background of industrialization and the mining
industry in the north of the country, an industrial
proletariat began to form which organized unions
and new political parties. In the larger cities,
the middle class also began to grow, comprising
state employees, traders, intellectuals and small
businessmen. These groups began to pressure for
political reform and demand economic and political
integration.
11.3 From the 1930s to the Early 1970s
The world economic crises of the 1930s hit the
Chilean export industry very badly, causing
unemployment and a decline in foreign capital.
This introduced a fourth party and a turning point
into Chilean politics. A new party of the middle
class emerged, the Radical Party, integrating two
previous Marxist movements. Until the early 1950s,
this additional party was a stabilizing factor within
the Chilean political system, because it joined
coalitions with both left and right-wing groupings
to back its three consecutive presidencies. Chile’s
presidential political system was dependent on
compromise because no political party could gain
the presidency on its own.
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
83
84
During the period from 1930 to 1970, wider groups
of the population were enfranchised. Electoral
reforms at the end of the 1950s, and the beginning
of the 1960s, cut back the control which largeestate owners had exercised over the votes of
agricultural workers and also limited the possibility
of vote buying. The integration of different social
groups into political life enabled middle class
parties to extend political influence to industrial
workers and the lower strata of society.
Further institutional and policy changes also took
place in the aftermath of the world economic
crises. Chile changed its economic model from one
that exported raw material (particularly saltpeter
and copper) to one that was more domestically
oriented. In this context, the State became the most
important economic and political actor. In 1939 a
state development agency was founded which was
aimed at building a domestic industry and to create
new job opportunities. State interventionism and
an increasingly expanding state sector remained
a central feature of Chile’s economic policy until
1973. It culminated in the nationalization of the
copper mines and other industries following
the election of left-wing party leader Salvador
Allende in 1970. It is said that although the Allende
Government proposed this move, it was widely
supported by different parties in the Congress.
11.4 The Military Regime from 1973 to 1989
Allende’s policy decisions triggered a strong
reaction from the right. Allende was deposed
and assassinated in a military coup in September
1973. General Augusto Pinochet led a military
dictatorship for the next 16 years. Under the
military regime a neo-liberal economic program
was introduced reversing and reducing the
State’s role in the economy, liberalizing markets,
deregulating working relationships and transferring
market principles to the social sphere. This
restructuring did not work without the military’s
use of violence, particularly against the urban
poor. The economic situation improved from
1985 onwards and this is said to have caused the
middle class to turn its back on protests against
deteriorating social conditions.
Following 17 years of authoritarian rule, the
military regime replaced the 1925 Constitution in
1980 and introduced a new Constitution, which
further strengthened the presidential system
and undermined legislative checks and balances.
The Chilean president, rather than the National
Congress, became the most important legislator.
Already, since 1925, had the Chile’s presidential
system be viewed as one of the strongest
presidential systems in the world. Nevertheless
the National Congress had stood out as a body
with significant powers and influence and as a
deliberative body and institutions for conflict
67
resolution and political negotiation .
The 1980s Constitution provided the president
exclusive initiatives in all matters relating taxation,
the creation of public agencies and employment
related to these, the creation and changes to
entitlements, social security and collective
bargaining procedures. The presidential national
budget would automatically be adopted if the
Congress did not rubber stamp it. Presidential
rights also included urgency and extraordinary
provisions.
In 1988 the military Government called for a
plebiscite on the continuation of its leadership. This
it lost. This marked the beginning of the transition
to democracy.
11.5 Democracy since 1990
Free and universal elections were called in 1990
and brought in as elected president the Christian
Democrat (CD), Patricio Aylwin. Aylwin governed on
the basis of the Coalition of Parties for Democracy
(CPD). Eduardo Frei, another Christian Democrat
who had already been president from 1964-1969,
succeeded Aylwin from 1994 to 2000. In 2000
Ricardo Lagos, a member of the Socialist Party (PS)
became president. He has since lead the Coalition
together with the Party for Democracy (PPD).
The transition to democracy was based on an
agreement between the old authoritarian powers
and the new democratic government to refrain
from prosecuting military officers for human rights
violations and also to preserve certain privileges
for the military. This included the continuing
position of Pinochet as supreme commander of the
military and the appointment of a certain number
of senators. The military still holds a dominant
position in the National Security Council (Conase),
and it holds a right of veto on questions concerning
human rights and institutional reform. These
and other prerogatives have limited the scope of
maneuver for the democratic governments.
67 Morgenstern and Nacif (2002)
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
Synthesis of four Country
Case
Studies
Phase
1 Report Summary
Findings and recommendations
The 1989 constitutional revision, which prepared
for democratic transition, did not reverse the
presidential upper hand in controlling the
legislative agenda. Executive initiatives dominate
the legislative process. The revisions mainly include
changes to electoral rules, including that all elected
legislators are chosen from two-member districts.
They encourage cross-party coalition lists and the
rule that one party or coalition can only win two
seats in each district if the second candidate on
its list received more than double the votes of the
68
second-place list .
Well-organized business associations lobbied the
new democratic government to stay on the liberaleconomic course. The economic plans of the new
democratic rules included the expansion of Chile’s
export model from one that was based mostly on
primary goods with very low levels of processing to
one where economic sectors are better integrated
and technological innovations replace the previous
basis of success, namely low employment costs,
flexible working relationships and exportation
of primary goods. These plans were also geared
towards reducing what is known as ‘deuda social’
(social debts), meaning to increase social and
economic inclusion.
68 Carey (2002),
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
85
Annex 4. Government comments
86
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
GENERAL COMMENTS OF THE CHILEAN COPPER COMMISSION
ICMM RESOURCE ENDOWMENT PROJECT – PHASE II: CHILE CASE STUDY
(Draft Main Report – October 2005)
We kindly acknowledge receipt of your request to
the Minister of Mining of Chile and to the Chilean
Copper Commission (Cochilco) for review of the
case study of our country, included as comparator
country case of the ICMM Resource Endowment
Project. Consequently, please find attached our
general and specific comments.
out that the implementation of a hybrid formula for
management of mining wealth is more efficient and
at the same time it favors the autonomy of mining
operations at a local level.
Resource Curse:
We feel very honored that the case of Chile has
been taken as case of reference and also that
the ICMM project underlines the importance of
the positive experience of our country’s mining
resources, the contribution of our mining wealth in
promoting our economic development, and at the
same time in decreasing poverty and improving
efficiency of our production costs and productivity in
the mining industry.
The study contains comments on economic
70
indicators , whether they reflect or not the
consequences of the ‘resource curse’. The case of
Chile defies the negative consequences of this line
of reasoning which are not going to be fulfilled sine
qua non for the development of Chile’s extractive
industry and in many other countries. Although,
the study includes several comments that could
be misunderstood as they were supporting such
concept.
Taking into consideration the worldwide discussion
about the sustainability of the mining industry at the
public financial organizations in the last years, we
consider as most relevant that the project is being
completed with some conclusions that emerge
from the economic and social experience of Chile
which our Government has debated in different
international fora. Consequently, we would like to
highlight hereby two conclusions of the study:
The reasoning of ‘resource curse’ means that the
mining industry does not necessarily contributes
to the economic development of countries with
significant or rich mineral resources, taking as
evidence poverty associated to backward mining
regions in developing countries. Finally, this theory
aims to demonstrate a correlation between the
dependency on mining exports and slow growth of
the national economy and greater poverty.
he great importance of economic growth from
T
mining in terms of sustainability for improvement
69
of social conditions and poverty reduction .
Concerning to the redistribution of mining
revenues, fiscal policies are a key factor to
encourage economic growth, employment, and
a fair distribution of wealth. According to each
fiscal policy, management of revenues could
have a centralized or decentralized allocation by
a government, and any of both alternatives could
be efficiently applied or recommended for the
management of public resources.
Other studies have responded this point of view,
considering some positive economic experiences of
countries with a substantial endowment of natural
resources. These studies demonstrate that exports
of goods produced with an intensity of capital,
machinery and chemical products, have stimulated
the endowment of other resources and encouraging
a technological skills and knowledge of those
activities, together with an open trade regime,
thereby diversifying exports and increasing trade
71 72
with different economic sectors .
●
●
Which formula has to be applied to redistribute
mining revenues? This will depend on the different
countries’ development level, their political, legal,
and economic structures, their fiscal management
policies, governance of local communities
versus those of the rest of the country, and the
centralized capacities to manage mining wealth.
The experience of some countries seems to point
69 Page 43, point 4.
References of the study that validate this approach are included in:
● Figure 3.2 shows that throughout the 1960’s Chile’s exports were
dominated by minerals. The economy did suffer from real exchange
rate appreciation in a classic attack of ‘resource curse’ (page 11).
● With the exception of the currency appreciation and subsequent crisis
in the early 1980s, there appears to have been no long-lasting signs of
‘resource curse’ since the overthrow of Allende and the introduction of
neo-liberal economic policies (page 15) (Executive Summary).
● Furthermore, as the importance of mining in merchandise exports
has fallen, the risk of an attack of “resource curse” correspondingly
recedes” (page 15)
71 The World Bank, From Natural Resources to the Knowledge Economy:
Trade and Job Quality, David de Ferranti….[et al.], 2001.
72 The Work Bank and the Central Bank of Chile, Conference on Natural
Resources and Growth, Chile, January 2002
70 The Challenge of Mineral Wealth: using resource endowments to foster sustainable development
87
88
Summarily, conclusions must be clear pointing
out mining resources as a potential asset for
development, instead of turning back to the ‘resource
curse’, whose implications are debatable in other
countries such as Chile, Australia, and Finland.
In this sense, we recommend to quote paragraph
46 of the Report of the Johannesburg Summit
(September 2002), where an improved contribution
of the mining activity is mentioned as a challenge
for reducing poverty in countries with rich
mineral resources. Also, herein mining extractive
industries are seen to enhance their environmental
performance and labor safety, their involvement
with local communities, and consultation with
stakeholders.
The Government of Chile supports the World
Summit reminder, but not the ‘resources curse’
analysis.
Success factors in the mining/economic sectors
relationship in Chile
The reasons behind ‘success factors’ are examined
in Chapter 5, which favor better synergies between
the Chilean mining sector and entrepreneurial
activities in other economic sectors. Even though
some other factors appear to be undertaken in
the rest of the document, these were not properly
individualized as ‘success factors’, and we suggest
to be developed in Chapter 5.
The above is related to the long-term strategy for
Chilean development –based on an open economy
to competence and receive private investment,
trade liberalization, modernization of the financial
system, modernization of the State, advanced
technologies for extraction and processing of
mineral resources, and other factors- besides
some economic and social policies, based on its
competitive factors.
●
For example, it is worth noting that Chilean copper
output and other minerals (molybdenum, nonmetallic mining) since the early 90’s, as briefly
75
commented in text , cannot be only studied as a
foreign investment issue, but also as a competitive
capacity of the national mining industry (i.e.:
competitive production costs, follow-up and
leadership in the international market, governance
capacity, adjustment to new technologies and better
practices, environmental and social certification).
●
See as example:
● Chile certainly has other advantages to offer foreign mining investors,
most important of which a very favorable geology, but also good
infrastructure with short distances to ports, a favorable climate with
extremely low rainfall in the main mineralized zones (which simplifies
environmental management), and stability leading to low country risk”
(page 50).
uman Capital Development (it is suggested to be
H
developed as 5.6.3.):
References and comments can be found in other
76
parts of the text . However, it is not developed
as a ‘success factor’ of the relationship between
the mining sector and other economic sectors
entrepreneurial activities.
With respect to “La Escondida” mining company,
the study should investigate thoroughly what
percentage of human capital other mining
companies use, as well as its individual impact
as consumer of goods and regional services.
The above could be further developed, as the
study seems to argue that Region II shows better
economic indicators than the rest of the country
due to the contribution of that mining company.
74 75 ompetitive factors (suggestion to be developed
C
as point 5.1):
A short reference on this respect was made under
73
bullet point 5.2 as advantages for the foreign investor,
but it was not clearly developed as “success factor”.
73 The following competitive factors have enormous
significance in the Chilean mining development:
● Favorable mining geology.
● Mining prospective – Important demonstrated
reserves at a worldwide level. According to the
74
USGS, Chile owns 38% of copper based reserves .
● Mining exploration capacity.
● Mining exports growth capacity.
● Seaports infrastructure development.
76 Mineral Commodity Summaries, January 2006
See as example:
● Chilean copper production has been growing rapidly since the
early 1990s, with mine production increasing from 1.6 million tons
contained copper in 1990 to 5.4 million tons in 2004. In the latter year,
Chile accounted for 37% of the world mine production” (page 10,
paragraph 3)
● Foreign investment has led to a rapidly growing sector since the early
1990s with mine production increasing more than threefold over the
period from 1990 to 2004” (page 16, paragraph 2).
See as example:
Through the 1980’s and 1990’s Chile benefited from an increasingly
educated and skilled labor force. This tradition has continued in
recent year and since 1990 government expenditure on education has
doubled, reversing the drastic cut in education spending undertaken by
the military government” (page 14, paragraph 1).
● It is probable that the existence of the Fund has made it easier for the
government to invest in long range educational and other programs to
improve human capital” (page 14, paragraph 3).
●
The Challenge of Mineral Wealth: using resource endowments to foster sustainable development