The Challenge of Mineral Wealth: Using Resource Endowments to Foster Sustainable Development”

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

UNCTAD

Established in 1964, UNCTAD promotes the development- Chile friendly integration of developing countries into the world economy. UNCTAD has progressively evolved into an authoritative TheChallenge ofMineral Wealth: knowledge-based institution whose work aims Chile 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. The Challenge of Mineral Wealth: www.unctad.org using resource endowments to foster usingresource endowments tofoster sustainable development The World Bank Group sustainable development 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) March 2007 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 Country Case Study 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

Telephone: +44 (0) 20 7467 5070 Printed at United Nations, Geneva Fax: +44 (0) 20 7467 5071 GE.08-50808–April 2008–1,000 E-mail: [email protected] UNCTAD/DITC/COM/2007/2 or [email protected] Contents

Executive summary 3

Chapter 1 Introduction 7 1.1 Objectives 8 1.2 Consultees 8 1.3 Report layout 8

Chapter 2 Chile’s economic, social and political background 11 2.1 Chile’s people 12 2.2 The chilean economy 12 2.3 Brief history of chile 13 2.4 Chile’s governance structures 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? 43 4.1 Overview 44 4.2 The impact of economic policies on outcomes at the national level 44 4.3 Do institutions and governance structures provide the linkage? 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 71 Annex 1 additional tables complementing section 3 of the main report 72 9.1 National statistics 72 9.2 Millennium development goals – summary for chile 72

Annex 2 Chile’s performance on governance indicators 77 10.1 Governance performance in recent years 77 10.2 The world bank governance indicators 77 10.3 Unu world governance survey 79 10.4 Conclusions 82

Annex 3 Brief political history of chile 83 11.1 Introduction 83 11.2 From independence until the 1930s 83 11.3 From the 1930s to the early 1970s 83 11.4 The military regime from 1973 to 1989 84 11.5 Democracy since 1990 84

Annex 4 Government comments 86 Preface Synthesis of four Country Country four of Synthesis Studies Case recommendations and Findings

In the past five years, the economic, social and ● How the mining sector overall contributes to 1 environmental dimensions of mining and minerals national development? have been the subject of wide-ranging consultation, ● What strategies have been effective in managing critical comment, research and analysis. The revenues generated by natural resources for Mining Minerals and Sustainable Development sustainable development and poverty reduction? Project (MMSD) and Extractive Industries Review ● How an individual mining project contributes (EIR) respond to the unprecedented focus of to development at national, regional and local public attention on the sustainable development levels? challenges for extractives in general and mining in ● What are the practical and policy implications for particular. mining companies, host country governments, development institutions, and NGOs? In May 2004, ICMM initiated its Resource ● What might the distinct responsibilities Endowment initiative to better understand how of these development partners be to large scale mining activity in low and middle support implementation of findings and income countries can enhance the socio-economic recommendations? development of host countries. The initiative aims to isolate the drivers of development effectiveness The three distinct phases of the initiative and in the mining and metals sector and to document related products are outlined below. the policy frameworks, operational practices, and partnership arrangements that deliver Phase 1: Analytical Framework and Tools sustainable outcomes on the ground. This action- research project is being done together with The initial phase of the project concentrated on the UNCTAD and the World Bank Group. ICMM also development of an analytical framework focusing consulted stakeholders such as mining companies, on governance processes, including the underlying governments, donor agencies, labor and non- factors and rules of the game that affect social governmental organizations (NGOs). and economic interactions and outcomes. These aspects were incorporated into a practical Toolkit to Much of the ‘resource curse‘ literature has focused assess local, regional and national socio-economic on problems rather than solutions. Consequently it impacts of mining. The Toolkit also deals with is not of much practical help in designing improved how mining operations impact on governance policy or filling gaps in knowledge. For example, structures, institutions and policy changes at how have apparently ‘successful‘ countries different levels of government. Phase 1 involved avoided problems now so widely perceived? Can an extensive literature review, and a ‘coarse-sift’ such outcomes be repeated in other developing comparative analysis of the relative economic economies endowed with an abundance of mineral and social well-being of 33 countries with a high resources? How should the main stakeholders dependence on minerals. Initial findings were work together to enhance positive socio-economic critiqued in a multi-stakeholder workshop which outcomes from mining investments? helped to shape a revised approach. To help bridge these gaps, some of the specific Phase 1 Published reports: questions the Resource Endowment initiative attempts to address are: ● Analytical Framework: Executive Summary

● The MMSD project was an independent two-year process begun in April Resource Endowment Toolkit 2000 of consultation and research with the objective of understanding how to maximise the contribution of the mining and minerals sector to Phase 1 Additional Online Resources: 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 ● Analytical Framework: Main Report Development (WBCSD). The Extractive Industries Review was announced in 2000 by the World ● Literature Review Bank Group as a comprehensive review of its activities in the extractive ● November 2004 Workshop proceedings industries sector in response to concerns expressed by a variety of stakeholders, primarily environmental and human rights organizations. The Review was completed in 2004. Phase 2: Testing, Synthesis and Emerging Lessons 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, This involved applying the Toolkit to two main Principal, ICMM. and two comparator countries, Peru (with Chile

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 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 multi- stakeholder workshop which provided valuable feedback.

Phase 2 Published reports:

● Four country case study executive summaries ● Synthesis report of findings of the four case studies

Phase 2 Additional Online Resources:

● Ghana, Tanzania, Peru and Chile country case 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.

● A Spotlight series that summarizes key aspects of 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 Executive Summary Synthesis of four Country Country four of Synthesis Studies Case recommendations and Findings

Background to the ICMM Resource Endowment manufactured goods. The direction of trade has initiative (Chapter 1) changed in a manner typical for many countries in Latin America, with other developing countries This report has been prepared on behalf of the increasingly becoming important trading partners. International Council on Mining and Metals (ICMM) for Phase II of the Resource Endowment initiative. From 1984 to 1999, an active exchange rate policy The initiative aims to demonstrate how mining by was pursued, where the rate was allowed to large international firms contribute to the socio- fluctuate within a band. This was complemented economic development of host countries and how by a relatively loose monetary policy and an these contributions can be improved. austere fiscal policy. The aim was to avoid real Phase I of the initiative developed a methodology exchange appreciation and, in fact, to encourage (the ‘Resource Endowment Toolkit’) to assess the real exchange rate depreciation in order to protect positive and negative socio-economic impacts of the international competitiveness of the tradables mining. Phase II tested this Toolkit on four country sectors. In 1999 Chile adopted a floating exchange case studies. This report provides an assessment rate policy. At the same time, the burden of of the socio-economic impacts of mining in Chile maintaining the real exchange rate at a competitive at the national, regional and local levels, the latter level was shifted to the monetary policy, with the with reference to the Escondida mine. adoption of inflation targets by the Central Bank.

Chile’s economic, social and political background Foreign direct investment (FDI) is large and much (Chapter 2) has been directed towards mining, which accounted for one third of all foreign direct investment from Chile has a population of about 15.8 million people, 1974 to 2004. However FDI in the services sector has also been growing rapidly and in some recent the majority of whom live in urban areas. About years has overtaken mining investment. a third of Chile’s population lives in the capital Santiago. Chile has had a history of democratic The quantitative contributions of mining to economic rule for nearly two centuries, interrupted only by a growth and poverty reduction at the national, regional short spell of authoritarian rule in the early 1920s and local level (Chapter 3) and the military government of General Pinochet, which lasted from 1973 to 1990. Since 1925 the At the macroeconomic level, the mining sector has Chilean Constitution set out a presidential system made considerable contributions and investment in of government overseen by a bicameral legislature, mining has sharply increased since the late 1980s. a Congress and a Senate. Chile shares with other With the exception of the currency appreciation and Latin American presidential systems the dominance subsequent crisis in the early 1980s, there appears of a strong executive with considerable legislative to have been no long-lasting signs of ‘resource powers. curse’ since the overthrow of Allende and the introduction of neo-liberal economic policies. The In 2003 Chile had a GDP per capita of US$5,216, recent very large increases in the price of copper the highest in South America. Over the period from and the consequent rapidly rising export income 1990 to 2003 annual growth in GDP was on average may, however, constitute a renewed challenge for 5.4%. Agriculture accounts for 5% of GDP, industry Chilean authorities to deal with Dutch Disease. It for 35% (including mining for 8% in 2003), and is probably significant that, since 2002-2003, the services for 54%. Since 1990, services have grown nominal exchange rate vis-à-vis the US dollar has relative to mining, although this trend was at least risen by close to 50%. This appreciation could hurt temporarily reversed in 2004. Real wages increased the competitiveness of non-mining export sectors by 2.4% per year on average from 1994 to 2004. in the long run. Chile has an open trade regime with low and uniform tariffs. Export value grew at more than 10% Improvements in living conditions and the reduction per year on average during the 1990s but slowed of poverty have been impressive, with the amount down in the new century, partly due to low copper of people living in poverty decreasing by nearly prices. The mineral sector dominates exports, 50% since 1990. The channeling of government which are relatively concentrated. However, Chile tax revenue from mining into investment in social has succeeded in diversifying its exports and has development appears to have played an important become an important exporter of fruits and some role in this process.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 4 The fact that mining revenue is not earmarked for and across different economic sectors, which have 5 redistribution to mining regions suggests that the reduced poverty through employment creation. directly identifiable positive economic and social Chile’s public sector has also struck a balance impact of the mining industry at the regional level between providing an enabling environment for the has not primarily taken place through redistributive private sector and the provision of public goods measures. It appears to have resulted from and services that help to redistribute economic synergetic and complementary economic activities wealth. It is not obvious how this has been achieved, that have delivered inputs to, or have benefited although there are two preliminary leads. First, the from, the presence of the mining industry. UNU World Governance Survey suggests that the country has established a specific pattern of policy Chile’s Region II, in the north of the country, has consultations and that this type of collaboration experienced faster economic growth than Chile as between public institutions and the private sector a whole, resulting in per capita income being about has been an important factor contributing to the twice as high and poverty having fallen dramatically. country’s economic success. Second, although Region II also outperforms almost all other regions the quality and magnitude of investment in human on most non-monetary human development capital has improved considerably, the single indicators such as literacy. At the same time, largest contribution to poverty reduction during subjective indicators, as well as interviews on site, the 1990s has come from additional employment reveal some concern over ‘quality of life’ issues. opportunities, most of which have taken place in Some of these concerns no doubt arise from newly emerging industries, rather than Chile’s what could be described as ‘growth pangs’ in an traditional export industries. In this context, it environment characterized by rapid economic and would appear that the mining sector has played social change. Some may have more to do with a kick-starting role in facilitating and stimulating the physical and geographical features of Region other economic activities. II, with its lack of vegetation and remoteness from major urban centers. What are the reasons behind the ‘success factors’? (Chapter 5) The mining industry in Region II has established unusually strong linkages with the local economy. Chile is generally considered to offer a stable and Local suppliers to mining companies have favorable legal environment to mining. Recent flourished, partly as a result of deliberate targeting changes to Chilean mining tax legislation, which and fostering of local suppliers on the part of were introduced following a heated debate, do mining companies, particularly Escondida. Mining not appear to have fundamentally changed this companies and the Government have also jointly characterization. The fact that the decision was supported the establishment of a ‘mining cluster’, taken in a highly transparent manner is likely to particularly by providing finance for suppliers have strengthened the confidence of all parties in seeking to obtain ISO 9000 and 14000 certifications. the fairness of the process by which the system for distribution of mineral rents is shaped. What is the linkage between mining investment and economic growth and poverty reduction? An important element in Chile’s public financial (Chapter 4) management system is its structural surplus rule introduced in 2000. This rule targets a cyclically Chile unambiguously leads the region in terms of adjusted fiscal surplus of 1% of GDP in the standard measures for the quality of governance. public accounts. Under the rule, the Government Chile’s institutions and governance structures and saves all copper revenues from the State owned its policy processes have not only achieved positive copper mining company Codelco above a long- macroeconomic results at the aggregate level; term reference price for copper. Other central Chile has also managed to activate synergies and government revenue is smoothed over the business complementarities between different economic cycle, using an estimate of potential output. sectors and trickle down mechanisms, with which The budget law then sets an aggregate central other countries are struggling. government expenditure ceiling, which is 1% of It appears that Chile’s governance structures GDP, below this structural revenue. The structural and policy processes have encouraged private surplus rule has provided a useful tool for policy sector activities by different-sized enterprises, making for budget preparation, helping to set

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development Report Summary Report Summary Phase 1 Phase 1 Synthesis of four Country Country four of Synthesis Studies Case recommendations and Findings Synthesis of four Country Country four of Synthesis Studies Case recommendations and Findings

4 revenue targets and expenditure ceilings. Recently, The question that could be asked is whether Region 5 higher revenue from increases in copper prices has II will continue as a mining region or if it will have a brought about overall surplus, which have been more diversified economic structure in the future. sterilized and used selectively to repay public debt. As long as the region continues to attract mining When economic growth is below trend, as during investment at the present rate, the answer to this 2000-2003, the structural surplus rule allows the question will have to be postponed. government to run deficits. The problem that was posed at the beginning of Conclusions and implications (Chapter 6) the work on the Resource Endowment initiative was why some countries navigate safely around Since the 1980s, Chile has practiced cautious and the obstacles to economic development that face appropriate policies that have allowed the country mineral dependent countries while others capsize. to retain macroeconomic balance in spite of In the case of Chile, an important part of the answer considerable variations in mineral export revenues appears to be an atmosphere of cooperation and and a pronounced boom in mining investment. compromise both across the political spectrum Chile has achieved export diversification, and between different actors in society. This particularly into agricultural products. High and cooperation and compromise is most important and broad based economic growth has resulted in visible between government and industry, but also strong employment growth and, together with exists with other parts of civil society, including government social expenditure, this has driven universities and associations in crucial supporting down poverty levels. The Copper Stabilization Fund roles. The deeper question, therefore, is whether has played a crucial role in smoothing fluctuations such an atmosphere can be replicated in countries in government expenditure, thus helping both that have not been able to acquire it by other to maintain macroeconomic stability and to means. 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 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

Introduction 1 1. Introduction

1.1 Objectives managed copper mine Escondida, which is located in Chile’s Region II in the Atacama Desert. This report has been compiled for the Resource Region II is in the north of the country and Endowment initiative of the International Council Escondida is situated approximately 170 km away on Mining & Metals (ICMM), and was prepared by from the city of Antofagasta. It was the first foreign Evelyn Dietsche and Paul Stevens, Oxford Policy owned mine in the region, and has been followed by Management (OPM), Ian Emsley, Anglo-American, several others since Chile’s return to democracy in and Olle Östensson, UNCTAD. Since the report has 1990. not been formally cleared by the organizations, the views expressed are those of the individual authors The objective of the country case studies is to and do not necessarily represent those of the answer the following three questions: respective institutions. ● How has mining contributed to national The objective of the Resource Endowment development? initiative is to study how the economic and social ● How has the Escondida mining investment contributions of large mining projects can be contributed to development at the national, enhanced. Phase I of the initiative took place regional and local levels? from July 2004 to January 2005 and developed an ● What national, regional and local governance analytical framework for this study. It has been structures and policies have been effective in summarized in a Resource Endowment Toolkit explaining the outcomes of both the mining which has been extensively peer reviewed by sector as a whole and Escondida in particular? social development specialists and economists in Have revenues generated by mining enhanced academia, non-governmental organizations and sustainable development and poverty reduction? government. 1.2 Consultees Phase I has benefited from inputs from a wide range of stakeholders at a workshop held in London A very wide range of stakeholders were consulted in November 2004. Many of the stakeholders during the preparation of the case study as shown have been critical of aspects of mining company in Box 1. The authors would like to emphasize that performance in the past. Their views have agreement to be consulted should not be taken as actively been sought to ensure that the Resource endorsement of the objectives of the study, or of the Endowment initiative addresses the concerns of a findings of this report. wide range of interested stakeholders. 1.3 Report Layout

Phase II of the initiative tests and validates the Box 1 List of Consultees analytical framework (in terms of its usability) developed during Phase I. It conducts four country ● Escondida management in Santiago and Antofagasta; case studies, for which this report on Chile is one. ● management of the Escondida foundation; The other three country case studies are Ghana, ● representatives of Escondida labor unions; ● Government authorities in Santiago and Antofagasta; Peru and Tanzania. All four countries are heavily ● local NGOs and community groups; dependent on mining and in recent years have ● national universities, in Santiago and Antofagasta; performed relatively well. Ghana and Peru were ● representatives of local government in Antofagasta; chosen as the two major case studies and two ● representatives of business associations in Antofagasta, consultant teams conducted country visits. Tanzania including representatives of small scale miners association; and Chile serve as comparator country cases. The ● representatives of other mining companies; and studies of Tanzania and Chile have largely been ● suppliers to Escondida desk-based and are not as detailed as the Ghana and Peru studies. This case study report presents the following: Chile has a considerable number of mines in both

the development and operational phases. Many ● Chapter 2 provides basic social, economic and new investments have taken place over the past political background information on Chile; 15 years. To examine impacts at the local level this case study has focused on the BHP Billiton

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development Report Summary Phase 1 Synthesis of four Country Country four of Synthesis Studies Case recommendations and Findings

● 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:

● 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 compared to other countries in the region, the 13 Government appears to prefer using a light touch in Chile’s population of about 15.8 million people regulation. Foreign investment has been strongly is not among the largest of the Latin American encouraged for the past three decades, including in countries. Its people are often described as the mining sector. However, large investments have homogenous and lacking regional differentiation. only taken place since the restoration of democracy Nearly 70% of the population are ‘mestizos’ in 1990. and more than 20% are of European decent. Amerindians make up a small minority of little The structural composition of GDP shows growth more than 5%. Europeans include not only those in the share of consumption (household and of Spanish decent, but also descendents of other government) since the 1990s, from 71% in 1990 to European countries and the Levant who immigrated 76% in 2003. Gross capital formation remains at a in the 19th century. Many of the latter became respectable level at 22%, compared to 26% in 1990. prominent entrepreneurs and professionals. In Agriculture accounts for 5% of GDP, industry for general, those of European background are better 35% (including mining for 8% in 2003), and services off in socio-economic terms. for 54%. Since 1990, services have grown relative to mining. This was reversed in 2004. Real wages The majority of Chileans (more than 85%) live in increased by 2.4% per year on average from 1994 urban areas. Migration from rural areas started in to 2004. Taken together with the growth in GDP, the 1930s, much earlier than in most other Latin and since employment increased at an annual rate American countries. Internal migration between of 2%, this implies that a large part of employment urban centers is said to be high. About a third of growth took place at the lower end of the income Chile’s population lives in the capital Santiago. scale. Segregation by income levels within Chile’s cities tends to be high and reflects differences in living Chile’s trade regime is open with low and uniform conditions and service provisions. Cities commonly tariffs. For imports from countries with which it contain relatively large housing developments does not have a trade agreement, Chile applies a (poblaciones) many of which were constructed with flat rate tariff, which fell to 6% in 2003, concluding subsidized loans. This has facilitated a relatively a five year program of annual 1% reductions. high percentage of home ownership (60%). This program, along with a number of free trade agreements and few non-tariff measures, makes 2.2 The Chilean Economy it one of the world’s most open economies with an average effective tariff of 2.1% in 2004. Export value In 2003 Chile’s GDP per capita of US$5,216 was grew at more than 10% per year on average during the highest in South America and reached three the 1990s but slowed down in the new century, quarters of Mexico’s GDP per capita. Over the partly due to low copper prices. They recovered in period from 1990-2003 annual growth in GDP 2003-2004 when copper prices again began to rise. was on average 5.4%, which was higher than the regional average. Growth in 2000-2003 fell below The mineral sector dominates exports, which the long-term average, but due to the rise in copper are relatively concentrated. However, Chile has prices it is estimated to have accelerated again in succeeded in diversifying its exports and has 2004. become an important/exporter of fruits and of some manufactured goods. Agricultural commodities Chile’s military dictatorship introduced liberal increased their share of total exports from economic policies in the mid 1970s, reversing 32.6% in 1990 to 37.1% in 2003, and the share attempts of previous governments to adopt a of manufactures increased from 9.8% to 15.6%. state-led economic system. Democratically elected Meanwhile, the share of minerals and metals in governments since 1990 have maintained the basic exports fell from 54% to 42%. Copper accounted for principles of a liberal economic order. Chile’s 37% of all exports. As a result of the large copper external economic relations are liberalized, and apart from temporary controls on short-term Instituto Nacional de Estadísticas, www.ine.cl capital flows, the capital accounts have also been 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 opened. The domestic economy is flexible and, 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 Unless otherwise indicated, data in this section is from UNCTAD, 2004. and Venezuela (UNCTAD, 2004, Table 8.2A).

12 price increases in 2004, the relationships took a floating exchange rate policy. At the same time, 13 turn, with mineral exports accounting for close to the burden of maintaining the real exchange rate 50% of total exports that year. at a competitive level was shifted to the monetary policy, with the adoption of inflation targets by the Manufactured goods are the most important import Central Bank. category, accounting for 75% of imports in 1990 and 70% in 2003. The main items in this category Foreign direct investment (FDI) is large and much are different types of machinery and vehicles, while has been directed towards mining, which accounted fuels were 16% of imports in 1990 and 19% in 2003. for one third of all foreign direct investment from For a large part of its energy needs Chile depends 1974 to 2004 (Comisión Chilena del Cobre, Cochilco, on natural gas from Argentina. This applies in www.cochilco.cl). However, FDI in the services particular for power generation, where 25 to 40% of sector has also been growing rapidly and in some power is generated using natural gas. recent years has overtaken mining investment11. In 2003, Chile was the third largest recipient of The direction of trade has changed in a manner FDI and had the third largest stock of inward FDI similar to that of some other countries in Latin in Latin America, in both cases after Mexico and America (although the way that the change Brazil. Chile is ranked the highest among Latin has come about may differ from one country American countries in UNCTAD’s Inward FDI to another), with other developing countries Potential Index. It is also significant to note that increasingly becoming important trading partners. outward FDI is growing. In 2003 Chile took the Trade with developing Asian and with other Latin position of third in the Latin American/Caribbean American countries in particular has almost region, after the British Virgin Islands and the doubled in relative importance, from 22.5% of Cayman Islands. exports and 29% of imports in 1990 to respectively 39% and 51% in recent years. Part of the reason 2.3 Brief History of Chile12 for this development is of course the very rapid increase in demand for minerals and metals, When the first Spanish arrived in Chile, the Incas including copper, in Asia. But it also reflects the were in control of the northern area and part of growing economic integration of Latin America central Chile. Warlike Araucanian tribes, who held and Chile’s growing trade with other countries in the Incas back, dominated much of the rest of the region, often within the framework of trade the country. The first Spanish settlements were agreements. established in the mid-sixteenth century: Santiago in 1541 and Concepcion in 1550. By the mid- Traditionally Chile has had an export surplus for seventeenth century the population of the Spanish goods and a deficit for services (with imports settlements numbered approximately 100,000. of services growing rapidly in recent years), but This population grew to about half a million by the the trade balance has consistently been positive. mid-eighteenth century and to one million by 1830. Payments to foreign investors have contributed to Europeans were concentrated in central Chile; few keeping the current account in deficit. settled in the northern and southern regions. This pattern began to change only in the second half of Chile has used a variety of different exchange the nineteenth century, with the rapid growth of rate policies over the past two to three decades.10 mining activities. From 1984 to 1999, an active exchange rate policy was pursued, where the rate was allowed to Under Spanish colonial rule, northern and fluctuate within a (rather broad) band. This was central Chile were part of the Viceroyalty of Peru. complemented by a relatively loose monetary Independence was first declared in 1810. At that policy and an austere fiscal policy. The aim was to time central Chile was mainly controlled by a small, avoid real exchange rate appreciation and, in fact, upper class of locally born European descendents. to encourage real exchange rate depreciation in Internal instability resulted in the restoration order to protect the international competitiveness of Spanish rule in 1814. Combined forces from of the tradables sectors. In 1999 Chile adopted a Argentina and Chile finally managed to defeat and drive out the Spanish army and claim independence Gobierno de Chile, 2004, p. 22. Metal Bulletin, 2005b, p. 6. 10 For a review of Chilean exchange rate policy over the past couple of 11 Data on FDI is from United Nations, 2004. decades, see Morandé, 2001. 12 see also Annex 3 for a summary of Chile’s political history.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 14 in 1818. In 1879-1883 Chile defeated Bolivia and workers and also limited the possibility of vote 15 Peru in a war for the control of the Atacama Desert buying. Further institutional and policy changes and its rich nitrate deposits. took place in the aftermath of the world economic crises. Chile also changed its economic model Mirroring political developments in Europe and from one that exported raw materials, particularly the United States, politics in Chile during the 19th saltpeter and copper, to one that was more century was characterized by the conflict between domestically oriented. In 1939 a state development supporters of a parliamentary model and the agency (Corporación de Fomento de la Producción, defenders of a strong presidential regime. The CORFO) was founded which was aimed at parliamentary model tended to dominate until building a domestic industry and creating new job 1920. Three parties represented in Parliament the opportunities. interests of the land-holding oligarchy and the different, newly emerging, urban classes. High State interventionism and an increasingly revenue obtained from taxing the export of raw expanding state sector remained a central feature materials allowed the State to invest in physical of Chile’s economic policy until 1973, when it and social infrastructure early on and to become culminated in the nationalization of the copper relatively autonomous and insulated from oligarch mines and industries following the election victory interests. of left-wing party leader Salvador Allende in 1970. Although the Allende Government proposed this After a short spell of military rule, a new move, it was widely supported by other parties in Constitution came into force in 1925, establishing the Congress. Allende’s policy decisions triggered a strong and typically Latin American presidential a strong reaction from the right. Allende was system of government. In the early years of the deposed and died in a military coup in September 20th century, industrialization and the mining 1973. General Augusto Pinochet led a military industry, went hand in hand with important dictatorship for the next 16 years. changes in the social structure. An industrial proletariat began to organize in unions and in the Under the military regime a neo-liberal economic cities, state employees, traders, intellectuals and program was introduced, again reducing the small businessmen forged a growing middle class. State’s role in the economy, liberalizing markets, New parties at the left of the political spectrum deregulating working relationships and transferring emerged. market principles to the social sphere. The restructuring did not work without the military’s The world economic crises of the 1930s, use of violence, particularly against the urban combined with dramatically reduced demand for poor. The economic situation improved from nitrates, Chile’s main export at the time, hit the 1985 onwards and this is said to have caused the Chilean export industry very badly, causing high middle class to turn its back on protest against unemployment and a decline in foreign exchange deteriorating social conditions. The military earnings. This triggered a turning point in Chilean Government lost a plebiscite on the continuation politics, allowing left-wing parties to gain more of its leadership, which it called for in 1988. influence from 1930s onward. The left pressured This marked the beginning of the transition to for political reforms and demanded economic and democracy. Free elections were called in 1989 political inclusion, but joined coalitions with both and brought in as elected president the Christian left and right-wing groupings to back its three Democrat, Patricio Aylwin, who governed on the consecutive presidencies. Until the 1950s the basis of the Coalition of Parties for Democracy additional left-wing party was seen as a stabilizing (CPD). Eduardo Frei, another Christian Democrat, factor within the Chilean political system, because succeeded Aylwin from 1994 to 2000. In 2000 it encouraged compromise in a situation where no Ricardo Lagos, a member of the Socialist Party (PS) political party could gain the presidency on its own. became president and has since led the coalition.

During the period from 1930 to 1970 wider groups 2.4 Chile’s Governance Structures of the population were enfranchised and electoral reforms at the end of the 1950s/beginning of the Chile has had a history of democratic rule for 1960s cut back the control which large-estate nearly two centuries, interrupted only by a short owners had exercised over the votes of agricultural spell of authoritarian rule in the early 1920s and

14 the military Government of General Pinochet, 15 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

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 developed. During World War I exports at times 19 exceeded 3 million tons a year. When Germany This chapter of the report addresses Stages 3 was cut off from nitrate shipments, however, an and 5 of the Toolkit as developed in Phase 1 of the atmospheric process was perfected for producing ICMM Resource Endowment initiative. It examines synthetic nitrogen. The resulting collapse of the the contributions of Chile’s mining activities with market for nitrates after World War I depressed respect to economic and social outcomes. The Chile’s economy for more than ten years. chapter is structured as follows: Following the nationalizations of foreign owned ● Section 3.2 explores the macroeconomic and social mines in the early 1970s, the state owned company, contributions of the mining sector at the national level; Codelco, dominated copper production. The ● Section 3.3 summarizes the contributions of mining to opening up to foreign mining investment initiated economic and social performance at the sub-national level, focusing on Chile’s core mining region – Region II ; by the Pinochet Regime resulted in few new ● Section 3.4 summarizes mining at the local level projects (the El Indio project was developed and ● Section 3.5 examines mining in Region II the mine Disputada de las Condes was bought by ● Section 3.6 compares regional and national socio-economic Exxon) before the re-establishment of democracy. development trends. The largest foreign investment project was the ● Section 3.7 examines Escondida’s role in regional economic development. one that is the subject of the present initiative, ● Section 3.8 provides a summary of this chapter. Escondida, which began mine development in 1988.

● Section 3.9 conclusions 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 Figure 3.1 North and Central Chile 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 1991- Region II 2003, total foreign mining investment in Chile was US$15, 475 million13. Chilean copper production Antofagasta has been growing rapidly since the early 1990s, Escondida with mine production increasing from 1.6 million tons containing copper in 1990 to 5.4 million tons in 200414. 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 3.2 Macroeconomic and Social Contributions of refined metal. the Mining Sector at the national level Copper and its by-products such as molybdenum 3.2.1 Overview of Mining in Chile and precious metals account for the major part of mineral production by value, although other Mining has always played an important role in minerals, including gold, iron ore and lithium, Chilean history and politics and, at times, has contribute to total mining activity and revenues. determined the country’s destiny. The history of Downstream processing of metals is relatively mining in Chile, after nitrates lost their markets, insignificant due to a limited local market and the has largely been the history of copper. logistical constraints of entering the larger regional market. For further details on the composition The mining boom in the Atacama Desert began and destinations of Chile’s mineral exports see when, in about 1860, a use was found for sodium Annex 1. nitrate in the manufacture of smokeless powder in 13 del Pino et al, 2005, p. 241. explosives. After the Pacific War, with the region 14 Figures on copper production and exports in 2004 and 2003 are from under Chilean control, the industry was further International Copper Study Group, 2005, table 3.

18 3.2.2 Mining and Economic Performance since the and all of the traditional, not necessarily effective, 19 1950s policy responses to deal with the symptoms of the problem, ranging from subsidies to increasing Between 1950 and 1973 the economic history of tariffs16. Chile was essentially that of a liberal democracy based upon a ‘structuralist’ view of the economic This period ended in 1973, when a military coup world. Inflation was seen as an inevitable price for ended the short reign of President Salvador economic progress and was tolerated. According Allende. Favoring free market economics, the to the ‘structuralist’ school, orthodox monetary subsequent military Government was against the solutions to inflation were of no use because of economic policies and social order proposed by the economic rigidities, and its effects could only Allende Government and embarked upon a radically be mitigated by institutional reform15. Inflation, different set of economic policies, which could be which averaged over 48% per annum between seen as a precursor of what in the 1980s became 1950 and 1973, was simply tolerated. Thus, the known as the ’Washington Consensus’. economic policy was characterized as requiring detailed regulation and subsidies, exchange and One of the prime objectives of the economic model trade controls and administered internal prices. of the authoritarian government was to reduce There existed a four-sided social dialogue between government intervention in the economy. Thus 472 the trade unions, political parties, industry and of the 507 state owned enterprises were sold off government. and in the remaining public services, quasi markets were introduced. The economy was opened up to Table 3.1 shows that apart from inflation (and even world trade with the explicit intention of promoting that was consistent and far from hyper inflation), the export sector. The State bureaucracy was the record of this system up to 1969 was not too reduced and public employment fell by 30% in 10 bad. However, fiscal deficits were growing rather years. The main fiscal objective was to reduce the ominously. The period culminated in 1970 with the fiscal deficit. In 1972, the public budget was 20% of election of the Allende Administration, which has GDP. By 1981 this had been reduced to 12%. been described as “… an ideological melange of structuralism, Marxism and a dash of Peronist- The first half of the 1970’s saw serious macro style populism.” (Maddison, 2001, page 154) The imbalances, since during the Allende Government, Allende Government held a different view on massive money creation and budget deficits had economic policies and embarked upon nationalizing reduced saving and investment to zero and ushered private industry, including mines, and incorporate in a period of hyperinflation. The situation required these into the public sector. a shock treatment, effectively reducing GDP by 12% between 1970 and 197517. Figure 3.2 shows that Figure 3.2 shows that throughout the 1960’s the economy picked up again during the mid 1970s Chile’s exports were dominated by minerals. until 1981. In the early 1980s the country saw a The economy did suffer from real exchange rate severe recession, worse than either the regional or appreciation in a classic attack of ‘resource curse’. income comparators. In retrospect, this was driven The consequences were dealt with by protectionism by serious policy errors, namely the simultaneous

Table 3.1 Economic Indicators

GDP: annual Average Inflation: annual Current Account Fiscal Surplus as % change average change Balance as % of GDP GDP 1950-59 3.6 36.6 -1.2 -1.6 1960-69 4.8 24.3 -2.3 -5.6 1970-79 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 Stevens, 2005. 15 Maddison, 2001 17 UNCTAD, 1987, table 6.2.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 20 use of the exchange rate to discipline inflationary international prices20. The reduction of import 21 expectations with the opening of the capital account tariffs also helped increase the competitiveness of prior to the stabilization of inflation. In the context other sectors including the of a high copper price and a greatly increased mining sector, which helped set the conditions for level of private sector overseas borrowing, this the mining investment boom of the 1990s. The resulted in an unsustainable appreciation of the Pinochet Government also undertook efforts to real exchange rate. Eventually, the copper price fell avoid exchange rate appreciation and reverse the and foreign confidence eroded forcing devaluation appreciation of the real exchange rate seen prior in 1982. The banking sector was saddled with to 1973, which had greatly inhibited agricultural unserviceable debts which required a government exports. bail out, leading to a brief return to public ownership of assets. The whole episode can be 3.2.3 Economic Performance since the 1990s seen as an outbreak of Dutch Disease aggravated by an erroneous policy response, but one that was Democracy was restored in 1989 and political quite rapidly reversed. power was carefully transferred to an elected civilian government in 1990. Continuity among Figure 3.2 Total GDP Growth policy advisers and some institutional safeguards have ensured that the macro and micro economic GDP ANNUAL GROWTH - Chile with Regional and Income policy orientation of the previous government Comparators 1961 - 2003 largely remained the same and have continued to CHILE Latin America and Caribbean Upper Middle Income the present day. Exports and domestic production 15 of competitive goods have continued to increase 10 in a context where barriers to trade have been 5 dismantled.

0 Percentage -5 Like its neighboring countries, Chile suffered a

-10 recession in 1998 as a result of the fallout from the

-15 Asian and Russian financial crises. The recession

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965 1963 1961 was also aggravated by a severe drought in 1999, which not only hit agricultural output but also Source: World Bank hydro-electricity supplies. The policy response was a quick tightening of monetary policy to keep the When democracy was restored in the 1990s, Chile’s current account in check due to falling exports. In economic success was largely the result of a boom 18 light of its experiences with the crisis in the early in agricultural exports . In the post 1973 period, 1980s, the Chilean Government introduced controls the military Government had pursued a deliberate on short-term capital flows to safeguard against policy to encourage exports by radically reducing the risk of quick withdrawals of financial inflows. the structure of protection that had been in place Although at the time Chile received much criticism for decades. This was a key to Chile’s economic for this policy response, in the aftermath it appears success. Whilst in 1970 Chile had exported US$33 to have been successful. Economic growth has million in agriculture, forestry and fishing products, 19 recovered in subsequent years. In 2003 GDP grew by by 1991 this had risen to US$1.2 billion . The 3.2% and, helped by higher copper prices, in 2004 it liberalization of the domestic economy and Chile’s grew by 5.8%. Between 1990 and 2003, Chilean GDP international trade links lowered production grew at an annual average rate of 5.4% and by 2003 costs and thereby increased Chile’s international Chilean per capita GDP was $4,523 - the highest in competitiveness. Export oriented policies ended South America. Figure 3.3 demonstrates that the the effective discrimination against agriculture Chilean economy outperformed both its regional in the 1950’s and 1960’s when tariffs and other and income comparators. import restrictions favored those economic activities that produced importable goods, making them domestically competitive at costs above

18 US Library of Congress, 2004. 19 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. 20 US Library of Congress, 2004.

20 Figure 3.3 Growth of Non-Mineral GDP 1970s, gold and silver production has increased 21 considerably although in the same period, exports NON-MINERAL GDP ANNUAL GROWTH - Chile 1971 - 2003 of lead and iron have fallen. As a result, the share CHILE Latin America and Caribbean Upper Middle Income of mining in GDP has roughly remained constant 25 40% at around 8% between 1967 and 1992 . Since

30% then, volumes have increased but the value has

20% suffered from the vagaries of fluctuations in prices,

10% especially with respect to copper. In 2001, Mining

0% accounted for 8.4% of GDP. Annual % Growth -10%

-20% In an effort to mute the impact of these fluctuations, 1 5 7 9 7 9 1 3 1 3 5 7 9 1 3 5 the Chilean Government introduced the Copper 200 199 199 199 198 198 199 199 197 197 197 197 197 198 198 198 Stabilization Fund in 1985. Whenever copper prices have increased, a proportion of revenue from Source: World Bank Codelco has been set aside to be drawn upon when the price of copper falls below its normal level’. The data also shows that inflation has also been brought under control. In large, this was the result Table 3.2 Contributions to Fiscal Revenue from Codelco and of giving the Central Bank independence in 1992. Enami However, the process to achieve this outcome was far from painless. For example, the sharp increase Year Codelco Enami Total Total in real interest rates in 1998 in response to the (Mill US$) (Mill US$) Fiscal Contri- financial crisis caused Chilean SME’s considerable Revenue bution hardship21. (Mill US$) (%) 1985 411 4 4,360 9.5 An important aspect of Chile’s economic successes 1986 455 14 4,718 9.9 lay in the fact that the economic reforms begun in the 1970s effectively galvanized Chile’s 1987 599 13 5,925 10.3 entrepreneurial classes to begin driving a process 1988 1,467 28 7,013 21.3 of economic growth. Indeed, much of the growth 1989 1,961 28 7,922 25.1 post 1973 was driven by Chilean capital helped by the availability of domestic credit22. Similarly, 1990 1,505 6 7,619 19.8 years of inflation encouraged families to replace 1991 870 11 8,494 10.4 conventional savings with investment in education. 1992 891 9 10,338 8.7 Through the 1980’s and 1990’s Chile benefited from an increasingly educated and skilled labor force23. 1993 418 29 10,771 4.1 This tradition has continued in recent years and 1994 858 22 12,137 7.2 since 1990, government expenditure on education 1995 1,735 25 15,502 11.4 has doubled, reversing the drastic cut in education spending undertaken by the military Government24. 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 1998 355 15 16,735 2.2 Economic Performance 1999 269 13 14,879 1.9 The role of mining in Chile’s economic achievement 2000 702 1 16,274 4.3 is important. Up to the overthrow of the Allende 2001 370 3 14,920 2.5 Government, minerals accounted for almost 90% 2002 326 1 14,182 2.3 of Chilean merchandise exports of which copper dominated. Its relative importance declined in the 2003 698 1 15,338 4.6 1970s and 1980s, but by 1992 copper still remained 2004 3,009 2 20,486 14.7 Chile’s most important product. Since the late Source: Comisión Chilena del Cobre (Cochilco), Anuario de Estadisticas del Cobre y Otros Minerales 1985-2004, July 2005, www.cochilco.cl. 21 ILO, 2003. 22 Schurman, 1996. 23 Hojman, 2002. 25 Banco Central de Chile, Indicadores Económicos y Sociales de Chile 24 Bertelsmann Foundation, 2003. 1960-2000.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 22 The authorities determine on an annual basis the the introduction of neo-liberal economic policies. 23 ‘normal’ level of the price. Until the mid 1990’s this The most obvious evidence comes from Figure 3.3, largely followed a ten-year moving average, but which shows that non-mineral traded GDP growth more recently has been set lower26. After 1987, the has considerably outperformed Chile’s regional resources available to the Fund grew substantially and income comparators. Furthermore, as the and in 1998-99 there were substantial withdrawals importance of mining in merchandise exports has following a sharp downturn in copper prices. fallen, the risk of an attack of ‘resource curse’ Additions and withdrawals were large in proportion correspondingly recedes. This is shown in to total government revenue in the 1980s, often Figure 3.4. reaching 10% of such revenue. Since the mid-1990s, however, they have been on the order of 2 to 3% of The recent, very large increases in the price of total government revenues. The Fund has helped to copper and the consequent rapidly rising export smooth out variations in fiscal income (which would income may, however, constitute a renewed otherwise show large fluctuations due mainly to the challenge for Chilean authorities to deal with variability in tax payments by mining companies). Dutch Disease. Reinvestment of profits by foreign It is probable that the existence of the Fund has investors (presumably mainly mining companies) made it easier for the Government to invest in long was about 6% of GDP in 2004 and is expected to be range educational and other programs to improve of the same order in 2005, compared to less than human capital. The overall counter cyclical effect of 1% in earlier years. Part of this increase may be Fund operations is less evident. The maximum size attributable to the impact of changes in taxation of additions to, or withdrawals from, the Fund has and to companies having exhausted the possibilities been about 1% of GDP, which may be significant. to use accelerated depreciation. It is probably However, it is probably too little to alone account significant that, since 2002-2003, the nominal for the reduction in the standard deviation of annual exchange rate vis-à-vis the US dollar has risen GDP growth from 7.3 and 7.0 in the 1970s and 1980s by close to 50%. This appreciation could hurt the respectively to 2.9 in the 1990s. competitiveness of non-mining export sectors in the long run. Figure 3.3 Minerals and Exports Within the scope of this initiative it was somewhat Ores and metals in merchandise exports 1962-2003 difficult to investigate in greater detail the contributions of the mining sector to government 100 90 finances and the annual budget. Table 3.2 below 80 shows the tax and dividend payments made by 70 60 the state owned companies Codelco (Corporation 50 National de Cobre) and Enami (Empresa National

Percent 40 30 de Mineria) from 1985 to 2004. 20 10 There are no comprehensive data on total tax 0 payments made by private companies. However, 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 the Chilean Copper Commission (Cochilco) has indicated that in 2004 the ten largest foreign mining Source: World Bank investors (who account for almost all private mining FDI has been an important driver in the increasing production) paid US$ 1,008 million in taxes. During the period from 1991 to 2003 they paid a total of role of minerals and has flooded into the Chilean 27 mining sector since the early 1990’s. According to a US$ 2,136 million . In comparison Codelco paid Chilean Government press release of 28th February US$ 3,009 million in 2004 (including dividends) and 2005, total FDI amounted to $2.62 billion in 2003, US$ 9,709 million from 1991 to 2003. but increased sharply to $7.15 billion in 2004. Regarding the contributions that the mining sector With the exception of the currency appreciation makes at the national level, we can draw the and subsequent crisis in the early 1980s, there following conclusions: appears to have been no long-lasting signs of ● Following the nationalization of the copper ‘resource curse’ since the overthrow of Allende and industry in the early 1970s, the mining sector

26 IMF, 2000. 27 del Piño et al. 2005, table 3, p. 240, and www.cocihlco

22 Table 3.2 Contributions to Fiscal Revenue from Codelco and Enami 23 Year Codelco Enami Total Fiscal Revenue Total Contribution (Mill US$) (Mill US$) (Mill US$) (%) 1985 411 4 4,360 9.5 1986 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 agricultural reform, the promotion of domestic 1980s, even though, in principle, the sector had ownership and the liberalization of trade links, been opened up for foreign direct investment poised the country for a boost in international some years before, i.e. liberalization and an competitiveness. This led to an impressive attractive mining regime can take time to result increase in exports and domestic production since in increased mining activity. Foreign investment the restoration of democracy in the late 1980s. has led to a rapidly growing sector since the early ● The importance of the mining sector has declined 1990s with mine production increasing more than in relative terms as other economic sectors have threefold over the period from 1990 to 2004. grown. Foreign direct investment in the mining ● Economic policies have shifted dramatically sector has generally increased since the early with every regime change since the 1950s but 1990s, and has seen another sharp increase not following the political transition in the late in 2004. Although much of the industry is now 1980s. The military Government, which reigned in private hands, two state-owned companies, from 1973 until the late 1980s favored a market Codelco and Enami, remain important. Their economy that promoted the export sector and contributions accounted for nearly 6% of reduced government intervention in the economy. government revenue over the ten-year period Macro imbalances inherited from before 1973 and from 1994 to 2004 and for more than 12.5% in the serious policy errors in the 1980s had a negative period from 1985 to 1994. effect on the country’s economic performance. ● Until 2004 the privately owned mining firms However, macroeconomic policy corrections and that have established themselves in Chile over complementary domestic reforms, including the past fifteen years had not significantly

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 24 contributed to government coffers in direct ways, Figure 3.5 Infant Mortality 25 principally because of low tax liabilities that are typical early in the life of a mine and the rather INFANT MORTALITY Chile with Regional and Income Comparisons 1960 - 2002 low copper price through the period 1992-2002 Latin America and Caribbean Chile Upper Middle Income (the taxation conditions under which the mining companies have operated have been common to 120 s all foreign investment and were not particular to 100 mining). However, they are likely to have induced 80 a positive impact on tax collections, inter alia 60 through complementary industries and - although 40 20

less important - employees' income taxes. In Deaths per 1000 Live Birth future years, direct tax payments are expected 0

to increase substantially as investments are -20 1960 1965 1970 1975 1980 1985 1990 1995 2000 depreciated and companies begin to show taxable Source: World Bank profits. ● Taxation of mining is likely to have been an Figure 3.6 Life Expectancy important factor behind Chile’s economic success, since it has provided the Government LIFE EXPECTANCY Chile with Regional and Income Comparisons 1960 - 2003 with substantial resources for investment in Latin America and Caribbean Chile Upper Middle Income human capital beyond what would otherwise 90 have been available. In addition, generally good 80 70 s government policies have contributed to the 60 impressive successes that various economic 50 sectors have achieved, including those that 40 provide inputs to, and result from, the presence of Number of Year 30 20 the mining industry. 10 0

3.2.5 Chile’s Social Performance 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: World Bank Chile’s social performance shows a largely positive picture. Since 1989 Chilean governments Figure 3.7 Literacy have promised to “boost economic growth with equity” (ILO 2003, p. 3) and to a large extent have Community Services

succeeded in doing so. The achievements of the Financial Services macro-economy are matched by improvements Transportation, Telecommunications in various social indicators. Figures 3.5, 3.6 and Commerce Chile 3.7 show the trends for the three elements of the Construction Physical Quality of Life Index - infant mortality, Antofagasta Public Services life expectancy, literacy rates. The Figures show Manufacturing that Chile has outperformed both its regional and Industries Mining income comparators. In terms of the Human Agriculture, Fishing Development Index, Chile currently holds one of the highest HDI ranking in Latin America and the - 200'000 400'000 600'000 800'000 Caribbean (HDI 2002 = 0.839). Source: World Bank Further details on key social indicators are given in Figures 3.5, 3.6 and 3.7 disguise that Chile’s social Annex 2, which summarizes Chile’s progress on the performance has not always been positive over Millennium Development Goals. The Annex shows the past couple of decades. During the era of the that the most significant improvements have taken military regime absolute poverty increased slightly place with respect to poverty and child mortality. compared to the period before 1973 and income And in those areas where progress has been less distribution worsened significantly. In 1969 the obvious, Chile had already started from relatively poorest 20% of the population accounted for 7.7% of high levels. consumption spending, whilst by 1988 their share of consumption had decreased to 4.4%, implying

24 a total decrease in average real income over the regions. In 1998 poor people made up 20.7% of the 25 period for this group by about 4%. For the same urban population, but 27.6% in rural areas. The time period the consumption share of the richest proportion of poor people in Region IX, where most 20% of the population increased from 43.2% to of Chile’ s indigenous minority lives, was more than 54.9%. Social expenditure as a percentage of GDP 34%. Poverty levels are highest in this Region and and minimum wages had also decreased markedly in Region VIII, both of which exhibited the highest during the 1970s and 1980s. rates of growth in the export industry (wood). With 15.4%, poverty is lowest in the region of Since the late 1980s, however, absolute and Metropolitana to which Santiago belongs (Instituto relative poverty have been reduced drastically. Nacional de Estadísticas). The proportion of poor people amongst the whole population has nearly halved. In 1990, 38.6% of In summary, given that the proportion of Chileans Chile’s population was still considered to live living in poverty has halved since the late 1980s, below the poverty line as defined by the World the country’s aggregate social achievements Bank28. This compares with 20.6% in 200029. Only an have been impressive. Although some differences approximately 6% of the population is still suffering remain between regions and between urban from “extreme poverty”. In 1987 this figure had and rural areas, macroeconomic achievements stood at nearly 17%30. and entrepreneurial activities serving the export markets have clearly brought higher living Table 3.3 Development of Poverty in Chile, 1987-1998 standards to many Chileans. A recent ILO study points out that the impressive reduction in poverty Year Share of extremely Share of poor (including has been brought about not by redistributive poor as % of total extremely poor) as % of measures but by a rise in formal employment, and population total population thus a declining unemployment rate. Where social 1987 16.8 44.6 disadvantages persist, it is expected that social 32 1990 12.9 38.6 policies will redress these .

1992 8.8 32.6 3.3 The Contributions of Mining to Economic 1994 7.6 27.5 and Social Performance at the Sub-National level 1996 5.8 23.2 Constraints in the scope of this case study 1998 5.6 21.7 have not allowed a detailed assessment of the Source: Jaime Sperberg (2003) contributions of the mining sector to economic and social performance at the sub-national level. With regard to income distribution the picture However, in contrast to other mining countries remains somewhat more contradictory. Since reviewed for the Resource Endowment initiative it 1987 the share of income that goes to the poorest would appear that Chile does not operate a public 20% of the population has slightly declined and finance system that earmarks revenue generated government measures aimed at reducing unequal by mining for redistribution back to mining regions income distribution have had little redistributing and mining communities. (The country is divided effects. Chile’s income distribution remains among into 13 regions, most of which do not host mining the most unequal in Latin America (Gini-coefficient activities). In regions where mining is not the only from 1990-1996 approx. 0.47%) and is only topped economic activity it would be difficult to single out by Brazil. The new democratic government was the impact of mining from that of other economic voted into power in 1989 with the expectation that sectors. a new social policy would reduce inherited social 31 debts (deuda social) . An added complication is that - as pointed out in the previous Sub-Section – taxes paid to the national Aggregate positive results with respect to poverty Government by private mining companies have not reduction somewhat disguise discrepancies yet amounted to very significant amounts, although between urban and rural areas, as well as between they increased sharply following the copper price increase in 2004 and are likely to remain high in 28 CIA, 2004. 29 Aninat, 2000. the future. However, the considerable contributions 30 Bertlesmann, 2003 and Sperberg, 2003 31 Sperberg, J., 2003 page 31. 32 ILO, 2003

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 26 to the government budget made by Codelco are and that this trend is reflected in all regions. 27 likely to have had the effect of loosening what could The Table also shows that the mining region of otherwise have been tight financial constraints Antofagasta (Region II) depicts a particularly on the Government and have probably permitted impressive improvement in poverty reduction. This higher spending, particularly on investment in achievement is further discussed in Section 3.6 human capital than would otherwise have been the below, comparing Region II with national averages case. and other regions.

This suggests that a detailed comparative analysis 3.4 Mining at the Local Level of the mining sector’s tax contributions at the regional level may not provide particularly useful This section of the report draws largely on Stage insights. More importantly, it also suggests that the 5 of the Toolkit and assesses the impact of the positive impact that mining activities have had on Escondida mining operation, which is located in the Chilean economy and its social achievements Chile’s Region II, also referred to as the region of are less the result of regional redistribution than to Antofagasta. The section explores to what extent the channeling of mining tax revenue into general there is a link between mining in this region and development expenditure by the Government, as economic growth and poverty reduction. well as synergetic and complementary effects between different economic sectors and how 3.4.1 Region II and its Economy they have been facilitated by public institutions and policies. In summary, the most important Region II, where the Escondida mine is located, now contributions of the mining industry to economic has a population of 498,000 people. It has grown and social development at the regional level may by almost a quarter since 1990 and much of the arise through the inducement of complementary increase is attributed to the increase in mining economic activities that provide inputs and result activity. The influx of people into Region II is most from the presence of the mining industry. noticeable in Antofagasta, the region’s capital, Table 3.4 below shows regional achievements where the population has increased from 223,600 to in poverty reduction and remaining differences 273,300 people. Other municipalities, however, have in poverty levels. As pointed out before it is also benefited from the growth in mining activity. indeed very striking that since 1990 the number Nearly 98% of the population live in urban areas, of Chileans living in poverty has nearly halved 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 Totals 4,966 39 3,837 28 3,288 23 3,160 22 3,081 21 2,908 19

Source: Encuesta CASEN, MIDEPLAN

26 on Earth. Nothing grows without irrigation and the rate was slightly higher than the national average, 27 region’s remoteness from other major population which was 1.75% per year. While the improved centers offers great obstacles to the differentiation employment opportunities and incomes resulting of economic activities. The economy of Region II is from mining are appreciated, the mining based almost completely dominated by mining. expansion is seen as carrying with it certain risks and disadvantages, at least by some sectors of the 33 As a result of the rapid expansion of mining, the population. region has experienced high economic growth since the early 1990s. In 2003, Region II had a GDP per Although more than seventy years have passed, the capita of US$11,996, more than twice the per capita crash of the region’s nitrate industry is frequently GDP of the country (US$5,216). The rate of growth cited and there are fears that the copper mining in GDP per capita has also been significantly higher boom will prove equally transitory. in Region II than in the country as a whole. Table 3.5 shows the distribution of employment among Income differences between those who work in sectors nationally and in Region II. the mining companies and related activities and

Table 3.5 Sectoral distribution of employment, Region II and the rest of the working population are significant. Chile, 1st Quarter 2005, % of total Figure 3.8 and Tables 3.6 and 3.7 show data from the year 2000, which appear to illustrate both that Sector Chile Region II income differences between sectors were larger in Agriculture and others 13.6 2.5 Region II than in Chile as a whole and that mining and the sectors associated with it had wages higher Mining 1.3 12.0 than the national average, while other sectors, Industry 13.2 7.6 particularly services, had wage levels considerably Energy, utilities 0.6 0.8 lower than the national average. It is also argued Construction 8.3 18.1 that demand from mining company employees contributes to high local prices, particularly Commerce 19.1 18.7 of housing. While there is no local price index Transport and communication 8.4 8.2 available, a comparison of prices of household Financial services 8.5 6.4 goods, including basic foods, in different regions, published by the National Statistical Institute, Personal services 27.1 25.7 appears to confirm that prices are indeed higher Source: Instituto Nacional de Estadísticas in Antofagasta than in other regions (see www.ine. cl). A housing cost index published by Universidad Mining accounts for 12% of employment in del Desarrollo (2004) shows indeed that the city Region II, compared to 1.3% in Chile as a whole. of Antofagasta was the urban area with the third Construction is also over-represented in the region, highest housing costs in the country, after Santiago while the proportion employed in agriculture and industry is lower than the national average. and the southern city of Coyhaique. Unemployment has been very variable, due to Figure 3.8 Average income by economic activity, October- variations in mining investment. During the years December 2000, Chile and Antofagasta, in Chilean pesos 1992-1999, unemployment was lower than the national average, mainly because of the boost to employment provided during the times when Community Services Financial Services the mining industry was expanding. In the first Transportation, quarter of 2005, unemployment stood at 8.8%, Telecommunications Commerce higher than the national figure of 7.9%, but lower Chile Construction than the other two northernmost regions (Instituto Antofagasta Nacional de Estadística). Employment has grown Public Services Manufacturing at a slightly higher rate than total population, or by Industries 2.1% per year during the period 1990-2001. This Mining Agriculture, Fishing 33 Region II accounted for 18% of all foreign investment under decree number 600 (the 1974 decree under which almost all direct foreign - 200'000 400'000 600'000 800'000 investment takes place) from 1990 to 2001 and for 39% of foreign investment in mining. Source : Income Survey. National Statistical Institute

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 28 Table 3.6 Average income by economic activity in Chile: October-December 2000, Chilean pesos 29 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 690’905 682’259 Manufacturing Industries 287’398 279’316 258’860 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 of total public investment in 2003, slightly more factor to the high frequency of commuting in Region than its share of the population (Corporación para II. Figure 3.9 shows the relationship between el Desarrollo Productivo: Inversión Pública Efectiva, housing cost and the net commuting rate by Región de Antofagasta 2003). As Figure 3.10 shows, region. In Region II, net commuting into the region the region’s share has declined slightly over the corresponds to 10% of the labor force, a very high past few years, mainly because centrally decided figure. investment has declined while investment decided by regional offices of the relevant authorities has Despite the impressive reduction in poverty in the increased. Within the scope of this initiative, it has region over the past 15 years it is widely perceived unfortunately not been possible to establish the that little of what the mining companies pay in taxes total amount of taxes paid by mining companies in is returned to the region in the form of social and Region II (mainly because Codelco has activities in physical infrastructure. For this reason there is several different regions of Chile, although the bulk strong support for the new ‘special tax’ on mining of its production is in Region II). However, Minera companies, of which 15% of the proceeds will be Escondida alone paid more than this amount returned to local development in the host regions. in taxes on profit and dividends to the central Region II received almost 52 billion pesos (about Government. The largest share of taxes on mining US$97 million at current exchange rates), or 3.9% is paid by Codelco and this is considerably more

28 than the public investment figure just mentioned. lithium minerals and nitrates are also produced 29 Finally, it is also felt that the contribution of mining (see Table 3.8). As new mines have opened, and companies to the region’s economy is unnecessarily existing ones have expanded capacity, production reduced by the fact that many of their employees has grown. Several new projects are under-way have permanent residence outside the region and at present, including one (Spence) owned by BHP spend little money locally. 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 Housing Cost and Net Commuting: Chile 2002 Nacional de Geología y Minería (Sernageomin), 0.1200 the regional mines and geology agency, to 0.1000 II number about 160. The small miners are joining e 0.0800 together to build a processing plant with mills,

0.0600 XI concentrator and an SX/EW plant to produce 2000

0.0400 tons of copper per year. The plant was donated XII by Escondida, which has also provided technical

Net Commuting Rat 0.0200 I III RM X assistance. The new plant, which will process 90% 0.0000 VI 50.0 60.0 VII 70.0 VIII IX80.0 90.0 100.0 110.0 120.0 of the present output of the members of the Small -0.0200 IV V Miners’ Association, will lead to higher incomes -0.0400 for members through higher recovery and lower Housing Cost Index transport costs. Source: Patricio Aroca, Universidad Católica del Norte, elaboration based on census data. Table 3.8 Mineral production in Region II, 1994, 1999 and 2003, Figure 3.10 Region II’s share of total public investment, 1998- thousand tons unless otherwise indicated 2003, per cent Year 1994 1999 2003 Metals* 5 Copper 1255.0 2410.8 2606.9

4 Molybdenum 11.0 14.2 16.4

3 Gold, tons 9.4 8.7 17.1 Silver, tons 334.3 372.0 496.7 2

1 Industrial Minerals

0 1998 1999 2000 2001 2002 2003 Apatite 6.7 9.3 6.6 Calcium Carbonate 674.8 856.1 949.7 Source: Corporación para el Desarrollo Productivo: Inversión Pública Lithium Carbonate 10.4 30.2 41.7 Efectiva, Región de Antofagasta 2003 Lithium Chloride - 0.2 0.0 3.5 Mining in Region II Quartz 166.3 216.9 131.0 Nitrates 822.4 916.2 1133.9 For a long time Codelco’s Chuquicamata Mine, which has been in operation since 1910, was the Pozzolan 79.4 80.8 81.9 only large copper mine in Region II. In the late Sodium Sulphate 42.7 58.0 44.0 1980s, the Escondida Mine became the first foreign Ulexite 25.8 26.3 37.5 owned mine in the region. Several others followed Gypsum 10.2 8.3 11.6 during the 1990s and early 2000s. Iodine 3.6 5.2 8.2

Now in 2006 there are a number of large mines in *Metal content operation. The most important ones are depicted Source : Servicio Nacional de Geología y Minería (Sernageomin) in Table 3.9. Copper is the main value mineral. Significant quantities of gold, molybdenum, silver,

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 30 Table 3.9 Large Mines in Region II 31 Mine Owners Start-up Production 2004, thousand tons copper Codelco Government 1910 983 Escondida BHP Billiton, Rio Tinto, Japanese Escondida 1991 1,195 Consortium, International Finance Corporation 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.

3.5.1 The Escondida mine Figure 3.11 Copper production at Escondida, thousand tons, 1990 - 2004 Escondida is located in the Atacama Desert, 170 km to the southeast of Antofagasta. The orebody 1,500 was discovered in 1981 by a joint venture between 1,250 Minera Utah de Chile and Getty Mining (Chile). Subsequent transactions resulted in a change 1,000

of ownership to BHP Billiton – the majority 750 shareholder and manager of the mine - Rio Tinto, 500 Japan Escondida Company and the International Finance Corporation. The decision to exploit the 250

orebody was of some historical significance as it 0 constituted the first post-Allende investment by foreign companies in the mining sector. It was (and 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 is) also the biggest foreign mining investment. Source: Escondida Seen as a risky move at the time, it represented an expression of faith in the new investment- Figure 3.12 Direct Investment in Escondida, 1991-2004 (in US$ friendly mining regime introduced by the Pinochet million) Government. It is of significance that the IFC was asked to purchase a share of the equity. 4,500 Construction commenced in 1988 and by late 1990 4,000 3,500 the first ore was processed in the concentrator 3,000 plant. The initial design production capacity was 2,500 320kt of copper/year, built at a cost of $836m. 2,000 Subsequently, the mine has undergone four 1,500 expansions which increased the concentrate plant’s 1,000 capacity from 35kt/day to 230kt/day. In addition to 500 0 this rapid increase in the processing capacity of Up to 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total the concentrate plant, investment has also been 1991 made in extending the original cathode production capacity from 80kt/year to 150kt/year. Figure 3.11 Source: Escondida shows the development of production. The mine is still undergoing a process of expansion, Since its inception, Escondida has undergone an which will end with the start of production at the almost continuous expansion. Figure 3.12 shows new Escondida del Norte open-pit later this year. the investment made (in current US$) over the life In excess of US$4 billion have been invested in of the operation, totaling US$4.2 billion. Escondida since 1988. Total production of copper

30 was 995kt in 2003 (847kt copper-in-concentrate flotation-based concentration for the sulphide 31 and 148kt copper cathodes) and 1,195 kt in 2004. ore and solvent-extraction with electrowinning The main byproducts are gold and silver, neither for the oxide ore. One aspect of new technology of which, however, account for a major portion of relates to the Sulphide Leach Project which aims turnover or profits. to utilize the currently sub-economic run-of-mine ore. This material has an average grade of 0.52%, Table 3.10 Byproducts in Escondida for which crushing, grinding and flotation cannot be economically justified. However, advances 2003 2004 in bacterial leaching allow for the recovery of Gold Kilograms 5’733 6’764 much of this metal. Leachate from this source will substitute for the gradually declining oxide Silver Kilograms 147’051 178’756 leachate. Source: Minera Escondida The Coarse Particle Recovery Project is another 3.5.2 Current Activities technical innovation that promises to utilize old tailings to deliver 50kt/year of copper-in- The mine consists of a single pit nearly 2.5km in concentrate. width and breadth. Both oxide and sulphide ores are mined, the former with a grade of approx. 3.5.4 Projected Mine Life 1.42%, the latter with a grade of 0.76%. The oxide ore is crushed and then leached near the mine At the end of 2003, Escondida had proven and site using sulphuric acid and the resulting copper- probable reserves of 19.4mt of recoverable copper, rich solution is electrolyzed in order to produce estimated at a price of 82c/lb and equivalent to copper cathodes. The cathodes are transported about 16 years of production at current rates. In by rail to Antofagasta for export. The sulphide addition, there were mineral resources, estimated ore is crushed and ground to a fine powder, with varying degrees of confidence, which imply which is concentrated using conventional flotation about 81mt of copper capable of sustaining techniques. The concentrate is then pumped production rates for a further 67 years. along a pipeline to a terminal at Coloso (near to Antofagasta) whence it is shipped to smelters in 3.5.5 Employment and Dependants North America, Europe and Asia. 8.5% of output is sold to customers in Chile. Direct Employment

In order to sustain the high level of production Minera Escondida accounted for 2810 direct a range of infrastructure, supplies and services employees in 2004, an increase of 13% on the are required. Escondida requires up to 320MW of 2486 employed in 2003. This increase reflected the power, which is provided by two private power- expansion of production at the mine. Over 99% of generating companies, one of which is located employees were employed at the mine site and port across the border in Argentina. The mine used facilities. about 64 million cubic meters of water in 2004, of which 23 million were recycled, principally for the Indirect Employment processing and transport of concentrate. The water is obtained from a 170 km pipeline that accesses Employment of permanent contractors at the aquifers in the Andean mountains. Water use is existing Minera Escondida operations totaled 2,345 minimized by de-watering of the concentrate slurry in 2004; this is an increase of 4% on the 2,257 at Coloso. In response to the need for further employed in 2003. In addition, 2938 temporary supplies of water, a seawater desalination plant contractors were employed on the expansion has been constructed at Coloso at a cost of US$159 projects (up from 1103 in 2003). million and capable of delivering 500 l/sec. Employees engaged in social investment and 3.5.3 Production Technology provision

The technology used to extract and process the Minera Escondida directly employed twenty-one ore is standard to the mining industry, namely full-time equivalents on social investment projects.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 32 The Foundation Minera Escondida was established mine site work a four-day shift and the company 33 in 1996 to support capacity building in education, at the minesite provides accommodation for this health, local business and community development. period. It employs 9 full-time equivalents. Social Distribution of Employment Induced Employment 11 employees are expatriate and 2,799 employees The multiplier given in the Toolkit applied to the (99 % of the total) are Chilean nationals. 104 totaled employment figures above gives an induced employees are female (3.7% of the total). employment range of between 8,505 and 12,887, between 5 and 6.7% of all occupied persons in Dependants Region II. There are 8,183 dependants of Escondida The Catholic University of Antofagasta (Patricio employees, which implies a dependency multiplier 34 Aroca-Gonzalez) in 1999 made an estimate of of 2.9 . If the same multiplier is applied to the Escondida’s secondary employment, which includes induced (including indirect) employment created by all employment in Region II created by the spending the mine, then the total number of dependants can of both the mine and its employees. Depending on be estimated as nearly 35,700. It is likely that the the degree to which spending by mine employees is dependency multiplier for Escondida employees is divided between goods and services produced within lower than for others whose employment is created or outside of Region II, the employment multiplier by the mine. could vary between 3.1 and 5.7. Evidence from a purchasing survey indicated a likely value of 4.2. 3.5.6 Human Capital Development for Employees The resulting figures, with temporary employment resulting from the expansion phases also included, Investment in training of Escondida’s employees for the period 1988-2004 are seen in Figure 3.13. In has increased steadily, both in terms of total 2004 the estimated induced employment amounted expenditure and in time spent on training per to 9,495 people. employee. Expenditure on training per employee was US$1,912 in 2004, up by 4 % from 2003, while Figure 3.13 Direct, indirect and induced employment of the number of man hours spent on training were Escondida 305,000; 21% more than in the previous year. A possibly more informative indicator is the number

20'000 of man hours spent on training as a portion of total man hours worked. This proportion rose

15'000 continuously from 3.9% in 2001 to 5.3% in 2004.

10'000 Training focuses on technical competencies, with 40% of total training time spent on technical

5'000 capacity development and an additional 30% on technical specialization. These training programs are mainly long-term, over about four years, and 0 are intended to ensure that employees’ skills are 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 commensurate with the demands placed upon Employment due to Investment Induced Indirect Operations (Contractors) Escondida them. The remaining 30% are devoted to health Source: Escondida and safety, management courses, languages and computer software. Local versus National Employment Escondida reimburses employees pursuing There are 2165 employees (77% of the total) living advanced studies for part of the costs incurred. in Region II (mainly in Antofagasta) and 635 living in other parts of Chile. The mine is situated in the The CEIM (Centro de Entrenamiento Industrial desert and there is virtually no community located y Minero, the Industrial and Mining Training close to the mine. The closest large settlement

is Antofagasta which, although 170km distant, 34 This figure is an overestimate as the figure for dependants includes represents the ‘local’ community. Employees at the employee spouses, some of whom are themselves employed.

32 Centre), founded in 1999, belongs to the Escondida Figure 3.14 Income taxes paid by Escondida and its 33 Educational Foundation and it is a non-profit shareholders organization whose main mission is to foster excellence in the mining industry. The Centre has 500 developed several programs on specific subject to improve employment opportunities for local 400

workers within Region II. CEIM has an alliance $ with the British Columbia Technological Institute 300

of Vancouver, Canada, which allows the Center to Million US 200 manage, develop and certified labor skills programs under the International Certification CEIM – BCTI. 100 The Center has been reinforced through an alliance 0 between Escondida and 20 other companies. It will graduate 350 technicians in electronics, electrical 1991 1993 1995 1997 1999 2001 2003 engineering, heavy machinery and industrial Source: Escondida machinery every year, beginning in December 2006. 3.5.9 Contribution to The Host Economy 3.5.7 Value of Procurement The value added by Escondida amounted to $1.2 A high proportion of procurement requirements, billion in 2003 and $2.7 billion in 2004. It was or 80%, are met from within Chile, and almost distributed between different parties as indicated in half from Region II. A portion of the domestic Table 3.12. procurement is, however, likely to consist of imported goods bought from local agents. In 2004, Table 3.12 Distribution of value added by Escondida, in US$ a year in which there was high spending on capital goods (which are more likely to be imported), Recipient 2003 2004 procurement spending was distributed as shown in Employees 106,681,925 146,430,872 Table 3.11. Contractors 131,886,519 164,405,966

Table 3.11 Geographic origins of Escondida procurement State of Chile 110,634,727 476,272,899 Shareholders 0 333,174,750 Origins Million of US$ Community 11,780,256 12,544,248 Region II Antofagasta 229,797 Reinvestment 774,753,000 1,463,948,000 Rest of the country 162,901 Financial Imports 90,429 Suppliers 74,946,290 65,623,617 Total 483,127 Total Value Source: Escondida Added 1,210,682,717 2,662,400,352

Source: Escondida 3.5.8 Taxes and Payments to Public Authorities The value added by Escondida made a significant Company income and dividend taxes amounted contribution to the wealth of Chile, accounting for to $423 million in 2004 and $120 million in 2003. 1.7% of GDP in 2003 and over 3.5% in 2004. Region Figure 3.14 shows the split between company II accounted for 7.1% of Chilean GDP in 2003, so income tax (15 to 17.5% in yellow) and dividend tax Escondida accounted for 24% of the value added in (17.5 to 20% in red) and the evolution of these tax Region II. payments since 1991. Employees’ income tax and social contributions amounted to US$16.2 million in Most of this value was retained in the Chilean 2003 and US$20.6 million in 2004. 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$ the total Region II mining sector. If it were to close, 35 it is unrealistic to believe that more than a small 2003 2004 proportion of those retrenched would find new Total Sales 1’938.9 3’660.2 employment at even 70% of the current Escondida Exports by destination (FOB) average wage level. Effectively, the opportunity cost of labor is therefore lower than the 70% figure. Of Europe 390.0 941.1 course, if the mining industry as a whole were to Germany 144.3 251.6 close, the opportunity cost of labor in Region II Spain 53.0 132.8 would be far lower still.

France 37.6 86.0 Land Italy 26.5 12.3 Netherlands 9.7 103.0 Escondida exists in a desert area where the opportunity cost of land is effectively zero. United Kingdom 6.6 24.1 Sweden 58.0 103.6 Capital Others 54.3 227.7 America 92.9 248.5 Some of the capital required for Escondida was raised in local markets. If the return on this capital Brazil 75.4 120.4 is similar on a risk-adjusted basis to return it would Canada 10.1 12.7 generate elsewhere in the Chilean economy, the United States 5.3 23.6 opportunity cost will equate to the actual cost.

Mexico 2.1 4.4 3.5.11 Contributions to Exports Others 0.0 87.4 Asia 1’046.6 1’728.1 Of a total sales value of US$3,660 million in 2004, US$2,917 million (80%) was exported. A similar Republic of Korea 187.1 342.4 proportion was exported in 2003. Direct imports in China 192.6 269.0 2003 were US$ 60.55 million, in 2004 US$ 76.26 India 112.3 199.6 million, mainly from US. Japan 467.9 818.5 3.5.12 Physical Infrastructure Taiwan province of China 26.3 73.4 Others 60.4 25.2 Escondida needed to invest in various forms of Other Destinations 29.3 0.0 infrastructure to ensure the provision of services to its operations. Power and water supply have been Total Exports 1’558.8 2’917.7 sourced from distant locations. These could, in Exports / Total Sales 80.4% 79.7% principle, also be made available to other users, but the benefits are limited because of the absence of Source: Escondida settlements in the Atacama Desert. Nevertheless,

the investment required to meet the increased 3.5.10 The Opportunity Cost of Economic Resources demands of the Region II mining industry has been credited with reducing the cost of power to the Labor public in general. Figure 3.15 shows the increase in generating capacity over the period of Escondida’s Anecdotal information indicated that wages in the operation and the decline in the electricity tariff. On mining sector in Region II are about 30% above the closure of the mine, the concentrate slurry pipeline wages in the non-mining sector in Region II (the (which extends to Coloso) could be converted to difference is actually larger, see Tables 3.6 and transport water thereby increasing the availability 3.7). As a first approximation, the opportunity cost of water to Antofagasta. A considerable road of employing labor at Escondida can be taken as construction program was required and completed 70% of the total remuneration, although the skills at a capital cost of $8.5m by 1990. These roads are of the two labor pools are somewhat different. maintained at an annual cost of $850k (in 2004) and Escondida makes up a significant part (14.2%) of are open for public use.

34 Figure 3.15 Generating Capacity, Copper Production and ● Second, while the Escondida mine is the subject 35 Power Prices in Region II, 1993-2002 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 4.000 45,0 for almost a century and several other large 3.500 40,0 mines have opened during the past ten years. 35,0 3.000 Nevertheless, by virtue of its size and also

30,0 mils/kW 2.500 25,0 because of its more focused efforts to contribute 2.000 MW 20,0 h to regional economic development, it is not 1.500 15,0 altogether unfair to attribute a large part of socio- 1.000 10,0 500 5,0 economic change - both positive and negative 0 0,0 - in Region II to the existence and activities of

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Escondida. Capacidad MW Producción de Cu I y II Región en Miles de Ton CMg mils/kWh 3.6.1 Some Socio-Economic Indicators and Trends Source : Minera Escondida for Region II, Compared with Other Regions and National Averages 3.5.13 Other Social Contributions Over the past decade and a half, Region II has A foundation established by Escondida, the experienced more rapid economic growth than Fondacion Minera Escondida (FME), carries out a most other regions in Chile. Average annual GDP wide range of social programs. It received US$15 growth 1988-2000 was 8.6% in Region II and 6.7% in million from Minera Escondida in 2000, which was Chile as a whole. In 2003, Region II had the highest intended to finance a five year program. GDP per capita in the country, at US$ 11,996 (www. FME paid $759,000 to support educational ine.cl), more than twice the per capita GDP of the programs in 2004. It paid $442,000 to support country (US$ 5,648, see Figure 3.16). health provision, mainly to reinforce the existing health system, and $132,000 to develop local Figure 3.16 GDP per capita, 1992 and 2003, in US$ current enterprise in 2004, mainly on training programs. Finally, FME paid $852,000 to community development in 2004, mainly for capacity building in 14.000 11.996 existing social organizations and especially to assist 12.000 indigenous people. 10.000

8.000 5.216 5.648 3.6 Comparing Regional And National Socio- 6.000 2.992 Economic Development Trends 4.000

2.000 This Sub-Section compares the socio-economic 0 trends and indicators of Region II with the rest of 1992 2003 Chile and tries to shed some light on the effect Chile II Región that mining may have had on living standards and the quality of life in this region. However, for Source: National Statistical Institute the following reasons we caution that the results Given the high level of income and the significantly presented here have to be interpreted very carefully. higher growth rate, it is not surprising that Region

II has also achieved the largest reduction in the ● First, we know very little about how Region II poverty rate in the country, with the incidence of would have looked without mining, particularly poverty being reduced by 60% from 1990 to 2003, since mining has been the dominant economic compared to 41.4% in the country as a whole. As of activity for the past 150 years and has thus the year 2000, Region II had the lowest poverty rate shaped both the economic and social landscape. in the country, at 10.9% of the population, compared It is likely that the socio-economic impact of to 20.6% for the country as a whole (www.ine.cl). mining has changed over this period of time, but past impacts underlie the present economic and social reality.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 36 Figure 3.17 Changes in the Incidence of Poverty in Chile by Region II, it may be useful to refer to a couple of 37 Region (regions I to XIII), 1990 - 2003 studies that are based on the concept of Human Development Index (HDI) developed by the United Nations Development Program (UNDP, the Spanish 0.0% acronym is PNUD). The UNDP Office in Chile carried -10.0% I

II out a broad study of HDI in Chile in 1998, where X IV

-9.3% VI XI VIII -20.0% Chile HDIs were also calculated for the different regions

-30.0% -24.8% and for a more comprehensive set of indicators, -32.3% constituting “human security” (PNUD, 1998). These -40.0% -37.3% -38.3% -41,4% -41.7% -42.2% -44.5% indicators include seven -50.0% -47.1% -49.3% dimensions: -54.2% -60.0% -60,0% -70.0% ● Health ● Education and culture

Source: National Statistical Institute ● Work ● Security for old age ("prevision") Unless growth is severely non-inclusive, it would ● Personal security ("seguridad clasica") be expected to lead to improvements in social ● Housing ("vivienda") indicators. This is indeed the case in Region II, ● Social life ("sociabilidad") which has significantly higher literacy rates than the country as a whole in all age groups, and the In 2003, the Observatorio Regional de Desarrollo highest adult literacy rate (at 98.2% compared Humano (Ordhum) made a repeat study for the to national average of 95.8%) in Chile (Instituto larger northern region encompassing regions I-IV Nacional de Estadística, 2002). Of course, a high and with some indicators measured for Region degree of literacy is positively correlated with II only. Both studies made a distinction between average level of education. Employees in Region the ‘objective’ index of human security, which II have the highest average number of years of used quantifiable measurements of the seven education in Chile at 11.4 years, while the average dimensions based on statistical data, and the for Chile is 10.67 (Instituto Nacional de Estadísticas, ‘subjective’ index, which measured six dimensions, excluding the housing dimension, and was based on 2002). This is probably a reflection of the dominance interviews (for details, see Ordhum, 2004, of the mining industry, where most jobs require a p. 30-32). good educational background.

Figure 3.18 Adult Literacy Rate, by region, 2002 3.6.3 Results on the Regional Comparison of Indices of Human Security

100,0 In the UNDP study, Region II had the second highest 98,5 98,2 98,0 97,9 97,9 objective index of human security, after Region XII, 97,0 97,3 Magallanes, in the extreme south of the country. 96,4 96,0 95,8 95,2 Region II scored particularly high in the dimensions 94,7 measuring education and security for old age, due 93,7 93,9 93,9 94,0 to a high average level of education and a high 92,7 92,3 92,0 portion of inhabitants who contributed to pension funds. On the other hand, Region II 90,0

I had the largest difference in results between I I II V X VI II IV IX XI VII XII VII RM

Chile economically active and inactive persons (Ordhum, C. Afta 2004, p. 36). Source: National Statistical Institute It is interesting to note that Region II had a 3.6.2 Background on Regional Comparison of significantly lower rank on the subjective index than Indices of Human Security on the objective one, or sixth among the twelve regions plus the metropolitan area. Two of the other In order to provide a more comprehensive and northern regions also had lower rankings on the nuanced picture of socio-economic features of subjective index than on the objective one.

36 In the repeat study by Ordhum, which included to accommodate the demand induced by mining. 37 calculation of the objective index in the four According to Aroca (1999, p. 6-7), economic growth northernmost regions, Region II had the highest in Region II during the 1980s was almost totally ranking for the objective index. The subjective index due to mining investment, in the early part of the was calculated only for Region II (in the three major decade by Codelco, in the latter by Escondida. cities of the region). As for the subjective index, a During these years, Region II had a growth pattern comparison between the results of the Ordhum that was distinctly different from that of the rest of study, and those obtained by UNDP in 1998 for Chile the economy. In the 1990s, mining investment was as a whole, shows that work and old age security obviously still very important, but as linkages were stand out as the dimensions where results are formed with other sectors and mining operations higher in Region II than for Chile as a whole. This assumed greater importance, induced growth in means that the population in Region II has a more other sectors started to become important. positive appreciation of their situation in these respects than does the population of Chile as a 3.7.1 Analysis of economic linkages whole. Somewhat paradoxically, however, the index for education is lower in Region II than in Chile, The total effects of mining on the economy can although the objective index shows the opposite. be calculated through input/output analysis. One may speculate that people with higher Simply expressed, input/output analysis uses education also tend to have higher expectations a matrix with coefficients that show how much from the educational system. In addition, Region each sector of an economy purchases from all II had lower results for social life and personal of the other sectors. Thus, for instance, an input security (Ordhum, 2004, p. 58-49). coefficient of 0.5 for the mining sector with respect to the construction sector means that for each Although the authors of the study are careful not to dollar of output generated in the mining sector, present a too definite interpretation to the results, 50 cents of additional output will be generated they mention as possible explanations that the in the construction sector because of mining inhabitants of Region II appear to be badly informed sector purchases. Adding up the coefficients for and that the low score on social life seems to be all sectors yields a multiplier showing the total correlated to the one for personal security. To put it backward linkages and therefore the total induced another way, people in Antofagasta are more scared increase in economic activity resulting from a given of being the victims of robbery or burglaries than increase in the output of one sector. For instance, they have ‘objective’ reason to be. total backward linkages of 1.5 means that for each dollar of output generated in a particular 3.7 Escondida’s role in regional economic sector, 0.5 dollars of output are generated by all development the sectors. Input/output matrices are usually constructed for national economies. In the case of As already seen, Escondida has contributed to the Region II, however, an input/output matrix has been growth of employment and incomes in Region II constructed for the region itself by researchers both by directly employing a certain number of at the Universidad Católica del Norte. This matrix people and by purchasing inputs and services from treats Region II as if it were an independent country local suppliers. Its social programs, managed by and considers all purchases from outside the region the Escondida Foundation, have also had a positive as imports - regardless of whether they originate impact on employment and income. In addition, the from the rest of Chile or from other countries - and expansion of the mining industry has necessitated all sales outside the region as exports. large investments in infrastructure such as the road network and electricity generation, and a portion The matrix includes twelve productive sectors, a of these have been financed directly by the mining final demand sector, and payments to factors of companies. production: labor (wages) and capital (profits). The impacts of a change in final demand (i.e. change in Economic growth in Region II since the late 1980s consumption, investment, government expenditure has been mainly driven by mining - including or export) are measured through the multipliers. In investment in new plants - and complementary addition, to overcome the criticism that an input– investment carried out by other actors, including output model “tends to underestimate economic the Government and the non-mining private sector, impacts because it omits the interaction between

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 38 households’ spendable income (particularly wages Table 3.14 Output multipliers for Region II, 1995 39 and salaries) that results directly or indirectly from economic activity and the consequent household Sector Open system Closed system spending on consumer goods” (Isard et al, Real estate services 1.02 2.33 1998, quoted in Aroca, 2003, p. 7), the impact of Other services 1.11 2.52 household spending is estimated according to two alternative hypotheses, resulting in two multipliers: Agriculture 1.14 1.76 Construction 1.21 2.20 ● The first one (open system) assumes that none Transport and 1.27 2.35 of the additional income (wages) that is paid for a communication change in the final demand is spent in the region (and that none of it flows back through trade with Mining 1.28 1.80 other regions). Manufacturing 1.28 1.79 ● The second multiplier (closed system) assumes Retailing 1.31 2.54 that all the additional labor income associated Fishing 1.35 2.08 with a change of the demand is spent in the region. Business services 1.41 2.93 Public administration 1.47 3.96 There are two reasons for introducing the two Utilities 1.66 1.92 hypotheses: Source: Aroca 1999, p. 8.

● First, a significant proportion of the mining industry employees have their permanent The open system multipliers vary between 1.02 residences outside Region II and can be assumed and 1.66, which means that for one additional to spend most of their income in their home dollar of final demand, the total output of the region. region increases by US$1.66 if it is spent in the ● Second, a portion of the income of inhabitants utilities sector or by 1.01 if the dollar is spent in the of Region II is also spent outside the region, real estate services sector. If the dollar is spent in although, as the economy of the region and the the mining sector it will imply an output increase of range of available products increases, this portion US$1.28. would be expected to decline. On the other hand, if it is assumed that new income In the absence of a household expenditure survey, that is generated by the additional dollar is spent in there is no basis for an estimate of the portion. the region, significant differences are found among Accordingly, the two multipliers calculated the economic impact of the sectors. The impact according to the open or closed system provide a on total output is greater when the dollar goes to range bracketing the ‘true value’ of the multiplier. service sectors, which are more labor intensive. The mining sector shows an output multiplier of It should be noted that mining investment and 1.80, meaning that for each additional dollar that operation have distinct expenditure structures is spent in the mining sector, 1.80 dollars are and therefore different impacts. While the first is generated in the whole region. very intensive in terms of the increase in demand directed towards the construction sector, mine Accordingly, the impact on total output of each operations need very little input from this sector. additional dollar spent in the mining sector will be between 1.28 and 1.80 dollars. The multipliers for the different sectors relevant to the case of mining operation are shown in Table Three points deserve comment with respect to 3.14. The data refers to 1995. The mining sector is Table 3.15: composed mainly by copper production, which in 1995 represented 84% of the total production of the ● First, as seen, there is a significant difference mining sector. The mining sector represented more between the multipliers according to the open than 60% of the regional product. and closed system. This demonstrates the important impact of wages on the demand directed towards the individual sector.

38 ● Second, compared to national input/output While the linkages described up until now refer 39 matrices, the multipliers are relatively low. to economic activity in the sectors concerned, This reflects the relative lack of economic income and employment multipliers, which can be diversification within a smaller geographical and calculated on the basis of the input/output matrix, administrative area such as a region compared provide more detailed information. Each dollar that to a country, which is also why household is spent in the mining sector implies an increase demand derived from wage payments assumes in the income of workers in other sectors. Workers larger importance. in the mining sector itself receive almost 10 cents, ● Finally, the ranking among sectors is different and between 6 and 14 cents go to workers in other from that which would be expected in a country. sectors, mainly the business services and retailing For instance, manufacturing and mining have the sectors. The exact amounts depend on how much of same multipliers, whereas in the input/output the additional income the workers spend in Region matrix for Chile, manufacturing would have a II. higher multiplier. However, the manufacturing sector is relatively small in Region II and inputs Table 3.16 shows the employment multipliers, from that sector would, in most cases, be that is, the impact in other sectors of the addition ‘imported’ either from the rest of Chile or from of one employment in a particular sector. In this abroad. Table, Escondida is identified separately from the rest of the mining sector, which at the time In addition to measuring the impact of a dollar was constituted almost only of Codelco’s Division spent in the mining sector, it is also interesting Chuquicamata. to know through which sectors the impact is distributed, that is, which sectors share the 28 Table 3.16 Employment multipliers for Region II, 1995 and 80 cents respectively. Table 3.15 shows the linkages between the mining sector and the other Sector Open system Closed system sectors of the regional economy. Real estate services 1.01 1.34 Table 3.15 Linkages between the mining sector and other Other services 1.04 1.21 sectors in Region II, 1995, cents per dollar Agriculture 1.06 1.13 Sector Open system Closed system Construction 1.20 1.57 Business services 11.5 19.7 Transport and 1.12 1.22 communication Utilities 8.9 16.3 Rest of mining sector 2.04 2.76 Retailing 5.7 12.7 Escondida 4.1 6.71 Manufacturing 9.8 Manufacturing 1.39 1.57 Other services 8.8 Retailing 1.10 1.27 Transport and 6.7 communication Fishing 1.22 1.25 Real estate services 4.8 Business services 1.45 2.34 Other sectors 1.7 1.3 Public administration 1.04 1.21 Total 28 80 Utilities 4.54 6.29 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 The figures in the Table mean that if Escondida mainly connected with the business services hires an additional employee, between 3.1 and sector, the utilities sector and the retailing sector. 5.7 additional jobs (depending on the assumption Under the closed system hypothesis, linkages regarding where employees spend their wages) with manufacturing, other services, transport and will be created in the rest of the regional economy. communication and other services also appear By contrast, the addition of a worker in agriculture important. 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 40 compared to other sectors is that these sectors are companies and the participating enterprises. It 41 capital intensive and that, relatively speaking, each is believed that the certification will make the of their workers requires more inputs. Moreover, companies more competitive, particularly in export the high relative wages of mine workers mean that, markets. While it is too early to assess the results if spending of wages is taken in to account, as in in terms of overall increased export success, the closed system, more employment opportunities anecdotal evidence suggests that it has worked for can be created in sectors with lower wages such as at least some companies. retailing. Finally, it should be noted that the input/output The contrast between Escondida and the rest of matrix described here is based on data from 1995. the mining sector is striking. The reason for the However, sectoral relationships are usually quite difference is that whereas Escondida outsourced stable over time, although obviously less so in a as many functions as possible, the rest of the region of a country than in a national economy. mining sector, which for practical purposes can An update of the input/output matrix, using data be taken to mean Codelco, internalized almost from 2000, has been carried out, but the results all functions. If workers directly employed by the are not yet available. However, from contacts with two companies are taken into account, the total the researchers responsible for the work, it is number of employment opportunities created was understood that the coefficients have remained almost exactly the same (Codelco had about 7,000 relatively stable over time. Therefore, it could be employees at the time, while Escondida had 2,000). concluded that the relationship between the mining sector in Region II, including Escondida, and the It may be wrong, however, to conclude that both rest of the regional economy has not changed. companies had an equal impact on the regional labor market, particularly if dynamic factors It may at first appear somewhat surprising that are taken into account. Escondida’s outsourcing the coefficients have not changed significantly, practices may offer greater opportunities for the since in the intervening time a great deal of suppliers to grow and deliver their goods and mining investment has been undertaken and local services to other mines, both in the region and suppliers have presumably accumulated greater outside it. These companies could thus form experience in meeting the needs of the mining the nucleus of a mining cluster, that is, a group sector. What needs to be remembered, however, is of businesses that are linked both by sales and that while the coefficients may remain unchanged, purchases and by other types of links that create the absolute values have increased dramatically. synergies, such as their use of common resources, Mining sector expenditure in 2000 was probably the same skills base, forms of association. at least twice as much in US$ terms as in 1995. Consequently, if the coefficients did not change, In the late 1990s, at the initiative of the regional the induced income in other sectors was also twice government, a joint program by government and as large. Moreover, unchanged coefficients in industry to develop a mining cluster in Region this particular case may actually be considered to II was established. The main participants in the reflect a deepening and strengthening compared program are the national Government through its to what would have been expected to be the case. ministerial representatives in the region, the mining The reason for this is the scaling up of machinery industry and the Industrial Association of Region and the continuous productivity growth in Escondida II (which also organizes the mining companies). and other mines. For instance, in 1995, Escondida Under the program, various initiatives have been used 50 ton trucks in the mine. It now uses 200 ton taken to foster the development of a mining cluster. trucks. Each truck needs roughly the same amount The Government has allocated US$15 million over of maintenance regardless of its loading capacity. the period 2002 to 2006, and this sum has been Thus, the local company providing mechanical matched by the mining companies. To date, the maintenance would have been expected to receive most important of these has been a drive to assist only a quarter of the previous income per ton of local companies linked to the mining industry to ore produced or dollar of mining sales revenue. obtain ISO 9000 and 14000 certification. The number While some goods and services would be expected of certified companies has grown from 8 in 2002 to remain proportional to output, some would have to 122 at the end of 2004. The cost of certification seen their coefficients weaken. The fact that the has been shared between the Government, mining coefficients have not changed may actually indicate

40 that the interaction between the mining sector 3.9 Summary 41 and other sectors of the economy have developed positively. Chapter 3 has examined the economic and social contributions of mining in Chile at the national, 3.8 Conclusions regional and local level. It has shown that at the macroeconomic level the mining sector has made Chile does not have any automatic mechanisms to considerable contributions and investment in recycle government revenues from mining back to mining has sharply increased since the late 1980s. the mining regions. Instead, national government Other economic activities have also increased spending is allocated to regions on the basis of resulting in the share of ores and metals in needs as perceived by the central Government and merchandised exports to decrease. Improvements this policy appears to be relatively uncontroversial in living conditions and the reduction of poverty (although, obviously, the population of mining have also been impressive, with the amount of districts would of course prefer to keep a larger people living in poverty decreasing by nearly 50% share for themselves). Region II has experienced a since 1990. The channeling of government tax highly positive economic and social development, revenue from mining into investment in social with rapidly growing GDP per capita, dramatic development appears to have played an important reductions in poverty and above average results role in this process. on human development indicators. This result The fact that mining revenue is not earmarked for has, by and large, come about as a result of strong redistribution to mining regions suggests that the economic growth, reinforced by close linkages directly identifiable positive economic and social between the mining industry and other sectors impact of the mining industry at the regional level of the local economy. These linkages have been has not primarily taken place through redistributive promoted by the mining companies, particularly measures according to a predetermined formula. Escondida, and it is likely that they would have been It appears to have resulted from synergetic and considerably weaker without this active promotion. complementary economic activities that have The efforts to build linkages do, however, go much delivered inputs to, or have benefited from, the beyond simply nurturing suppliers on an individual presence of the mining industry. Mining regions are basis. The mining cluster in Region II (which, of course likely to have benefited to the same extent although it is concentrated to that region is not as other regions from the Government’s general limited to it) was a joint initiative by the national expenditure on development, a significant part of government and the mining companies in Region II, which derives from mining tax revenues. with Escondida being the main driving force on the industry side. It has focused not just on adapting As concerns Region II specifically, the region has suppliers’ practices to the needs of their Region II experienced faster economic growth than Chile as customers, but on raising their competitiveness on a whole, resulting in per capita income being about international markets by supporting their efforts twice as high and poverty having fallen dramatically. to get ISO 9000 and 14000 certification, a more long Region II also outperforms almost all other regions range strategy than one might normally expect. on most non-monetary human development indicators such as literacy. At the same time, The vision for the economic future of Region II has subjective indicators, as well as interviews on site, not been clearly articulated, although it is clear reveal some concern over ‘quality of life’ issues. that efforts to diversify the local economy are Some of these concerns no doubt arise from supported by both the government and by all other what could be described as ‘growth pangs’ in an interested parties. Neither the Government nor the environment characterized by rapid economic and companies appear to see any need for any radical social change. Some may have more to do with changes in long range strategy at the moment. The the physical and geographical features of Region question that could be asked is whether Region II, with its lack of vegetation and remoteness from II will continue being a mining region or if other major urban centers. The mining industry in sectors will eventually overtake it. As long as the Region II has established unusually strong linkages region continues to attract mining investment at the with the local economy. Local suppliers to mining present rate, however, the answer to this question companies have flourished, partly as a result of will have to be postponed. deliberate targeting and fostering of local suppliers

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 42 on the part of mining companies, particularly 43 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? 42 443 4. What is the linkage between mining Investment and economic growth and poverty Reduction?

44 4.1 Overview Successive generations of the “Chicago Boys” 45 have been able to prove that the macro-economic This chapter largely applies Stage 4 of the Toolkit dimensions of ‘resource curse’ can be avoided if and explores the proximate linkages between governments have the capacity and the willingness mining investments and economic growth and to manage the potentially negative macro- poverty reduction. It focuses on the impact consequences. that economic policies have had on the positive outcomes described in Chapter 3 (Section 4.2) and A key contribution to Chile’s economic success whether governance indicators explain this success lies in the exchange rate policy. After the 1981- (Section 4.3). 82 crisis, as can be seen from Figure 4.1, the policy was to generate a real depreciation of the 4.2 The Impact of Economic Policies on Outcomes currency and between 1982 and 1988 the real rate at the National Level depreciated by around 60%. The gentle appreciation towards the end of the 1990’s evident in Figure This Sub-Section summarizes the main 4.1 was rapidly corrected. As already noted, a macroeconomic policies conducted and their significant appreciation has occurred over the last impact on key indicators. It also establishes two to three years, and it is not yet clear to what whether in recent years Chile has suffered from an extent this will impede competitiveness. Apart from attack of ‘resource curse’. any other consequence, this exchange rate policy encouraged new high-value agricultural exports to Figure 4.1 The Real Effective Exchange Rate spearhead a general export led economic revival.

Real Effective Exchange Rate for Chile 1980 - 2004 Figure 4.2 Budgetary picture

Real Effective Exchange Rate 200 CHILE - Fiscal Deficit/Surplus & Budgetary Revenues 180 as a Percentage of GDP 1960 - 2000 160 140 Fiscal Deficit (-) / Surplus (+) as a % of GDP Budgetary Revenues as a % of GDP 120 40% 100 30% 80 INDEX (100=2000) 60 20% 40 20 10% 0

0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 0% 198 198 198 198 198 198 198 198 198 198 199 199 199 199 199 199 199 199 199 199 200 200 200 200 200 -10% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Source: IMF International Financial Statistics -20%

The economic policy story of Chile is far from Source: World Bank being all plain sailing. Mistakes were made and policies were often “unstable and inconsistent over At a fiscal level, budgetary prudence has also time” and on occasions far from the neo-liberal been central to macro-economic policy since the economic policies associated with the “Washington mid 1970’s. Figure 4.2 shows that for most of the Consensus”35. For example the ‘big bang’ reform period the budget has been run at a slight surplus. program of 1978-82 proved to be erroneous. It Budgetary revenue has shown a gentle decline as allowed exchange rate appreciation to break the a percentage of GDP from around 30% in the late inflation levels but led to capital inflows, which 1970s to around 20% in the 1990’s in part reflecting triggered a balance of payments crisis once the a reduction of government intervention in the copper price fell, threatening domestic financial economy. stability36. Nonetheless, those directing Chile’s macro economic policy – the so-called “Chicago Another key element in the policy story was the Boys”37 – were willing to learn from their mistakes. success in tackling inflation. Figure 4.3 shows clearly the hyperinflationary years of the Allende 35 Stevens, 2005. 36 Schurman, 1996. Government. 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 Thus, the authoritarian Government of Pinochet well known proponent, Milton Friedman. was able to reduce inflation to manageable

44 Figure.3 Inflation, 1961-2003 As indicated in Sub-Section 3.2, the development of 45 exports is the key to understanding the basis of the Inflation (Consumer Prices) - Chile 1960 - 2003 Chilean success story as expressed in the growth Annual % Change Inflation, consumer prices (annual %) of non-mineral exports shown in Figure 4.5 above. 600 From the early 1980’s, successive governments 500 committed themselves to integrating Chile further 400 into the global economy. Thus trade liberalization

300 policies included two unilateral tariff reductions (1991 from 15 to 11% and in 1998 from 11% to 6%) 200 plus a variety of free trade agreements with Latin 100 American neighbors, Canada38 and the United 0 States. As can be seen from Figure 4.6 and Figure

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 4.7, this has led to a steady growth in non-mineral exports. Exports as a percentage of GDP has Source: World Bank 4 increased from the low of 10% in 1973 to over 35% today. Minerals have played an extremely important Figure 4.4 Inflation, 1993 - 2003 part in the story of expanded exports. However,

Inflation (Consumer Prices) - Chile 1960 - 2003 the growing volatility of mineral exports after 1992 Annual % Change disguises the fact that by virtue of the Copper Inflation, consumer prices (annual %) 600 Stabilization Fund described earlier, the impact of

500 such volatility on Chile’s public finances has been significantly muted. 400

300 Figure 4.6 Exports, as a percentage of GDP 200

100 Exports of goods and services (% of GDP)

0 40

1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 35

30 Source: World Bank 25 proportions by the end of the 1970’s, although this 20 15 was often done at considerable costs, not least in 10 terms of increasing unemployment. In 1992, the 5 Central Bank was given autonomy and allowed to 0

pursue its own policies to meet inflation targets. 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Figure 4.4 shows that this has proved extremely successful. Monetary policy has been central to Source: World Bank

Chile’s policy in inflation and exchange rates. Figure 4.7 The Role of Government in the Economy

Figure 4.5 Exports Inflation (Consumer Prices) - Chile 1960 - 2003 Annual % Change Inflation, consumer prices (annual %) Inflation (Consumer Prices) - Chile 1960 - 2003 600 Annual % Change 500 Inflation, consumer prices (annual %) 600 400 500 300 400 200 300 100 200 0 100 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

0 Source: World Bank 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Source: UNCTAD 38 Aninat, 2000.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 46 An integral part of the Chilean success story has linkages between different economic sectors 47 been the policy drive to reduce direct government could be established. intervention in the economy and to facilitate the ● Mineral tax revenue, mainly from the state-owned role of the private sector. Using government mining companies, but increasingly from privately consumption expenditure as a proxy, Figure 4.7 owned companies, has been channeled into shows that the ‘structuralist’ policies of the 1960’s development expenditure. This has both relaxed had inexorably led to a growth of government constraints on government spending and, through intervention in the economy and that expenditure the operation of the Copper Stabilization Fund, remained high until the later years of the military reduced fluctuations in such spending. regime. Following the overthrow of Allende, the ● Economic growth is essential for sustainability, Pinochet Government sought to roll back the direct improved social conditions and a reduction in economic role of the State and create an enabling poverty. However, the cause and effect is by no environment to encourage the development of means automatic and arguably, in the early days 39 the private sector . However, it has not done so of the economic reform program, poverty did dogmatically, but selectively. In the mining sector increase and social conditions did deteriorate. the state-owned company Codelco remains a Poverty levels have come down markedly since prominent player. the restoration of democracy in the 1990s. This suggests serious efforts on the part of A number of key points emerge from the analysis government to enforce trickle down mechanisms. of Chile’s economic and social experience at a However, except for housing, these do not national level: appear to link to particularly institutionalized redistribution channels using fixed formulas, ● The potential negative economic effects of having but rather to effective public policies that have a dominant mineral sector are well understood encouraged growth in human capital, allowed and have been countered by macro-economic the private sector to flourish and promoted policy based upon fiscal prudence and a sound consensus building across different social groups monetary policy to control inflation and to avoid to share the benefits of increased economic real exchange rate appreciation. However, for activity. Over the medium term it will be important Chile there was a period of learning by doing and that the comparative advantages that Chilean macro-policy mistakes were made. Lessons were entrepreneurs have occupied in the export quickly learnt and the mistakes not repeated. markets remain competitive (i.e. natural resource These lessons have general applicability and based products), or that the gains made from thus today there is, in principle, no reason why a current exports are utilized to build comparative dominant mineral sector should cause macro- advantages in new industrial sectors. economic damage. Arguably, at a national level, ● Trade liberalization has been compatible with assuming political consensus on the part of the the development of new economic sectors. governing coalition to promote generally good These sectors have been important in increasing policies, the macro-economic dimensions of employment, which in turn has been the principal ‘resource curse’ should no longer be an issue. reason for the decline in the incidence of poverty. However, the policy prescriptions have been ● Mining can produce good local and regional known for a long time and not all governments economic gains without any explicit mechanism have followed them. The purpose of the for redistributing mineral revenues and without Resource Endowment initiative is precisely to decentralized government. Arguably, equity attempt to determine under what circumstances is best served by redistribution of revenues to governments are able to follow these generally poorer regions (i.e., the non-mining regions). accepted policy prescriptions. ● A stable regime of competitive mining taxation ● An export oriented economic policy, coupled is helpful (but not sufficient) in attracting mining with enabling and encouraging private sector investment. However, mining taxes are usually involvement, produces a sound economic growth performance. However, to produce this result, ‘rear-end loaded’ and thus take time to deliver various episodes of government intervention were fiscal benefits. required to create the environment in which the ● Revenue stabilization funds work best if they are private sector could flourish and complementary insulated from political pressures (both local and national). The payoff from exchange rate stability 39 Stevens, 2005; Hojman, 2000. has been economic diversification.

46 4.3 Do Institutions and Governance Structures of institutions and governance structures in 47 provide the Linkage? economic development. Thus, the time series for which data is available is short; for the WB The ICMM initiative has strongly emphasized that Governance Indicators these are less than a institutions and governance structures are a key decade and the UNU World Governance Survey variable for enhancing the positive contributions only provides four years worth of data. Another that the mining sector can make to broaden socio- consequence is that the definitions and emphases economic development and to reduce poverty. of individual sub-variables aggregated to an Institutions and governance structures set the overall assessment of the ‘quality of governance’ framework for and condition how public sector remain disputed and subject to refinements. entities, citizens and private sector companies relate to each other. For the mining industry ● Furthermore, existing governance indicators have this means that if institutions and governance been defined to serve a number of objectives structures are unable to establish consensus and in a number of areas. However, it is not among these groups, the contributions that mining obvious why all dimensions of governance are activities can make to broader socio-economic equally relevant to different sets of problems. It development and poverty reduction will be is also possible that there are trade-offs between constrained. the different dimensions. Annex 2 gives the definitions and concepts underlying the indicators This emphasis on institutions and governance structures is supported by internationally that are used here. acknowledged research which, during the course of the 1990s, has confirmed that the quality of 4.3.1 Chile’s Performance on Governance ‘governance’ as an independent variable explains Indicators: Summary much of the cross-country differences in socio- economic outcomes. In the context of the ‘resource Both, the WB Governance Indicators and the UNU curse’ literature a number of quantitative studies World Governance Survey show that Chile’s lead in have suggested that improved governance the region remains unchallenged. This can clearly structures and institutions correlate with better be seen from Figure 4.8. Chile’s lead remains 40 development outcomes . It would strongly appear greatest for the two indicators that measure the that Chile’s success in using macroeconomic respect of citizens and the state for the institutions achievements and economic growth to reduce that govern economic and social interactions (‘Rule poverty and broader social inclusion has been of Law’, ‘Control of Corruption”, and “Regulatory facilitated by its institutions and governance Quality”). It is smallest for the indicators that structures. measure the process by which governments are Certainly, Chile’s performance with regard to selected, monitored and replaced (‘Voice and conventional governance indicators has been Accountability’ and ‘Political Stability’). Compared impressive by all standards. Annex 2 reports in to previous years, these gaps appear to have detail on the quality of governance in Chile as narrowed. measured by the six World Bank (WB) Governance Indicators. These indicators would most likely Figure 4.8 Chile (green) compared to Latin American averages appear in the governance conditionality that the (yellow and brown), 2004 Extractive Industries Review (EIR) proposed. Annex 2 also reports on Chile’s results regarding six CHILE (2004)

governance arenas proposed by the United Nations Voice and University’s (UNU) World Governance Survey. This Accountability Sub-Section summarizes the results. Political Stability Government There are general, but important, caveats: Effectiveness Regulatory ● It is only relatively recently that the international Quality community has fully recognized the importance Rule of Law 40 Researchers have made use of indicators on the quality of governance Control of reported by a number of survey institutes, think tanks, non-governmental Corruption organizations and international organizations and compiled on the basis of perceptions gathered from a large number of enterprises, citizens and expert survey respondents. 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 48 Figure 4.9 Chile’s Governance Indicators from 1996 to 2004 civilian government. The least improvements have 49 taken place with regard to the performance of the 2.5 bureaucracy, which is now observed as the weakest

Voice and Accountability link of Chile’s governance structures. 2

1.5 Political Stability Annex 2 also compares in more detail Chile’s results with that of its neighboring country Peru. 1 Government One of the key observations is that Peru’s absolute

0.5 Effectiveness improvements over the past years have been Regulatory Quality greater than those in Chile. In particular Chile’s 0 Rule of Law lead has diminished with regard to the legislative -0.5 process and the performance of the bureaucracy. Control of Corruption 1996 1998 2000 2002 2004 On the other hand, Chile’s lead with respect to the governance of the economy has also been confirmed. Chile’s particular strengths compared Figure 4.9 depicts Chile’s performance on the to Peru lie in citizens’ respect for the system of six WB indicators from 1996 to 2004. The data rule making, clarity in judicial decision-making shows that during the late 1990s there was a processes and public officials’ respect for property slight deterioration regarding the two indicators rights. But for both countries, the performance that relate to the process by which governments of the bureaucracy and the judiciary remain the are selected, monitored and replaced (“Voice and weakest aspects of governance. Accountability” and “Political Stability and Absence of Violence”). However, both indicators improved by 4.3.2 Implications 2002 and remained nearly unchanged in 2004. What do these results indicate? Chile The two indicators measuring the capacity of unambiguously leads the region in terms of government to effectively formulate and implement standard measures for the quality of governance. sound policies do not show much variation over the It would appear that the country has been better eight-year period. However, they appear to mirror governed than any of the other Latin American each other: “Government Effectiveness” improves countries. However, data on governance indicators when “Regulatory Quality” deteriorates, and vice has only been collected for a short period of time. versa. Thus the indicators can only suggest that Chile has been well governed since the second half of the With regard to the respect of citizens and the State 1990s. Indicators do not explain how Chile managed for the institutions that govern their economic and to achieve this performance in the first place. social interactions, one of the indicators - “Control of Corruption” - showed an improvement from Taking into account Chile’s contemporary political 1998 to 2000, almost in parallel to that of “Political history summarized in Annex 3, it is plausible to Stability”. Whilst there is a slight deterioration assume the following: thereafter, over the eight-year period this indicator

improved most strikingly, together with “Voice and ● Had indicators been compiled for earlier periods, Accountability”. The only indicator that deteriorated Chile’s performance on the process by which over the eight-year period is the “Rule of Law”. governments are selected, monitored and replaced would have looked much worse, at least Chile’s results of the UNU World Governance up to the democratic transition in 1990. Therefore, Survey largely confirm those of the WB Governance significant improvements for this governance Indicators (for details see Annex 2). They also dimension must have been achieved in the early points out that respondents in Chile unambiguously 1990s. felt most confident with respect to how economic ● The same logic is partially plausible with regard society is governed, both in 1996 and in 2000. The to the respect of citizens and the State for the UNU results provide further details and have noted institutions that govern their economic and social that specific improvements in recent years have interactions. This at least, if respect is considered included a decrease in political discrimination a voluntarily rather than coerced action. and greater subordination of the military to the ● Substantial improvements to the capacity of

48 the government to effectively formulate and Thus, it is plausible that this has been key in 49 implement sound policies are more likely to have linking the presence of the mining industry with been achieved prior to the early 1990s. Earlier the development of other economic sectors and the sections of this report suggest that improvements trickle down mechanisms through which greater in this area have preceded the democratic economic activities and government revenue transition. Furthermore, building economic power provide social and economic benefits to citizens. and administrative capacity are likely to have been of great importance for backing the political But these conclusions still leave many questions, power of the authoritarian Pinochet Regime. including the following:

Chile’s most impressive achievement would ● How, in effect, have Chile’s governance structures appear to have been that the political transition and policy processes encouraged private sector at the end of the 1990 managed to fundamentally activities by different-sized enterprises and improve political rights and accountability without across different economic sectors, which have undermining the economic and administrative basis reduced poverty through employment creation? on which the former regime had rested. This has ● How has Chile’s public sector struck the balance helped Chile to avoid falling back into a vicious cycle between providing an enabling environment for of opposing interest groups fighting over particular the private sector and the provision of public stakes within the context of the democratic process, goods and services that help to redistribute leading to collectively undesirable outcomes. economic wealth? And how, in particular, is this It would appear that this is what distinguishes balances struck at different tiers of government Chile’s economic and social success. If this logic (national, regional, municipal)? holds true, the key question is what governance ● Why does Chile outperform other countries structures and processes have allowed Chile to most strikingly in how it governs entrepreneurial follow this path and to overcome the collective activities, and what political constellations have action problems that other countries have typically enabled it to do so? faced. In the context of this study on mining, the ● How has Chile built credibility with the next question is how this has impinged on the international mining industry to such an extent transmission links between the presence of, and that it reinvests profits in new mines, thereby revenue from, mining activities and the social and making it worthwhile for other entrepreneurs to economic benefits that citizens have gained from establish long-term relationships with the mining these. sector?

In summary, governance indicators tell us The answers to these questions impinge on the concrete measures that the mining industry little about the socio-political processes that can take to contribute to enforcing trickle down have allowed Chile this head start (for example mechanisms. There are two preliminary leads: compared to its neighbor Peru). But cross-country comparisons help to raise the important questions. ● First, the UNU World Governance Survey suggests For answers, it requires further probing into that the country has established a specific governance structures and processes. pattern of policy consultations and that this type of collaboration between public institutions and How and why do these results matter for the mining the private sector has been an important factor industry? From this report one can so far conclude 41 contributing to the country’s economic success . that Chile’s institutions and governance structures ● Second, although the quality and magnitude and its policy processes have not only achieved of investment in human capital has improved positive macroeconomic results at the aggregate. considerably, the single largest contribution to Chile has also managed to activate synergies and poverty reduction during the 1990s has come complementarities between different economic from additional employment opportunities, most sectors and trickle down mechanisms, with of which have taken place in newly emerging which other countries are struggling. It is entirely industries, rather than Chile’s traditional export plausible to suggest that the country’s governance industries42. In this context it would appear that performance has been key in entrepreneurs

taking advantage of economic opportunities and 41 UNU, Hyden et al, page 158 in better delivery of public goods and services. 42 ILO 2003

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 50 the mining sector has played a kick-starting role 51 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’? 50 551 5. What are the reasons behind the ‘success factors’?

52 5.1 Overview – the Story so Far could cover a broader range of issues, this Sub- 53 Section focuses on Chile’s mining legislation, tax Chapter 4 has probed into the proximate linkages legislation and recent changes in environmental between mining investment and economic growth regulations. and poverty reduction and has asked how Chile’s institutions and governance structure have 5.2.2 Mining Law managed to facilitate economic activities that have created employment and reduced poverty. The Chile’s current mining law dates from 198343. It contrasting experience of other mining countries contains detailed and unambiguous rules that aim analyses within the context of the ICMM Resource to provide security of mine titles and give guidelines Endowment initiative suggests that Chile has for the resolution of conflicts. It is unusual in provided an environment, which has achieved better that it provides protection and supplies specific synergies between the mining and entrepreneurial solutions as far as organization of enterprises is activities in other economic sectors. The task of concerned to small-scale mining. The law 18.097, Chapter 5 is to explore, in greater detail, plausible “Ley organica sobre concesiones mineras”, which explanations for this success. has constitutional status and protects the right of a concessionary to his mining concession, adds Due to time and resource constraints, this Chapter detailed regulations on mining rights and, inter 5 is not as comprehensive as the two main studies alia, defines the duration of a mining concession of the Resource Endowment initiative undertaken (concesión de explotación) as indefinite. for Ghana and Peru. It covers more selectively issues that are important in contrast to the two 5.2.3 Foreign Investment and Mining Taxation main studies. Legislation

Some factors have clearly contributed to Chile’s The law on foreign investment, the decree law success in both attracting mining investment and number 600 of 1974, one of the first legislative converting mining exports into development gains. initiatives of the Pinochet regime (with revisions The time available for the case study did not allow to details through another decree, number 523, an in-depth assessment of these factors, although in 1993), provides the basic conditions for all their positive impact is undisputed. Among factors foreign investment, including foreign investment in contributing to Chile’s attractiveness for mining mining. It provides very robust guarantees against investors are: nationalization and expropriation. It also defines the most important aspects of the taxation of foreign ● Favorable geology, including potential for large enterprises that invest in mining or other sectors in mineral deposits Chile. All taxes are paid to the central Government, ● Exploration capacity with the exception of the mining patent, an annual ● Developed port infrastructure fee that has to be paid to protect the mining title, which is paid to the region. In contrast to As has already been observed, one of the factors many other mining countries (e.g. Ghana and behind the favorable development in Region II has Peru), there does not appear to exist a particular been the synergies between mining and other institutional channel through which mining revenue sectors. It should maybe be emphasized that this is redistributed to those regions in which the mining synergy would probably have been more difficult to revenue is generated. attain without the investment in human capital that has taken place since the return of democracy and The foreign investor may choose to be taxed under a which has improved the capabilities of the suppliers special regime providing invariability of income tax to the mining industry. for ten years (which could be extended to 20 years for investments over US$50 million), or 5.2 Legal Framework and Regulatory Environment the general regime, which provides no protection for Mining against changes in tax legislation44. Following

5.2.1 Introduction 43 See www.cochilco.cl for the full text. 44 See Otto, 2000, for a summary of Chilean tax legislation as regards mining. While details have changed, the summary is mostly still valid. The The first column of the taxonomy is entitled Legal Chilean legislation provides two alternatives of incorporation: companies and Regulatory Framework. While in principle this with limited liability (sociedades anónimas) and “partnerships”, a mode of

52 the invariability regime, corporate income tax is to avoid double taxation with Argentina, Spain, Peru, 53 17%45 (“first category tax”) on accrued income and Ecuador, South Korea, Norway, Brazil, Mexico, 42% in additional withholding tax on dividends, Canada, Poland, United Kingdom, Denmark, Croatia distributions or remittances with the 17% credited and Sweden. against this levy. Under the general regime, the first category tax is 17% and an additional tax 5.2.4 Recent Changes in Mining Taxation of 35%, against which first category tax can be credited. Of 23 foreign mining companies that have In recent years, there has been heated public invested under decree number 600, five, including debate in Chile, both in media and in Congress, over Escondida, have chosen the general regime, while tax payments by foreign mining companies48. It has the others have all elected the invariability regime. been argued that these payments were relatively As companies begin to declare taxable profits (see modest, considering the weight of mining in GDP below) they are increasingly moving to the general or exports or compared to the amount of foreign regime46. Once a company has chosen the general investment in mining that had taken place since regime, it is not able to reverse the choice. the early 1990s. As has already been mentioned in Chapter 3, the ten largest foreign owned mining The legislation is generous to investors with companies paid a total of US$ 2,136 million in respect to deductions for feasibility studies, pre- tax or on average US$164 million per year from 49 production exploration costs and development 1991 to 2003 . In comparison the two state-owned costs, all of which can be capitalized and deducted companies Codelco and Enami have made tax over a period of years. Companies can also use payments of over US$9,700 million for the same 50 accelerated depreciation of capital investment. period of time . Of the ten, two companies paid Losses can be carried forward indefinitely. A limit taxes throughout the period. Escondida is one of on debt/equity ratio is imposed, at present at 75/25, these two companies. Two others paid taxes for to avoid investors disguising transfers as interest the first time in 2003. One had accumulated losses payments. A representative ratio for international that exceeded its taxable profits and the other five mining companies registered on stock exchanges had not yet started to pay taxes, mainly because is 30/70 (debt/capitalization), but comparisons are they started up late and were still benefiting from difficult since the mining companies holding an the provisions on accelerated depreciation. There investment agreement under decree number 600 in are two main reasons why tax payments by foreign Chile are not registered on stock exchanges47. It may owned mining enterprises have been relatively low: also be misleading to compare project finance with corporate balance sheets. ● Except for one or two years, copper prices had been at a historically low level during the period Chile certainly has other advantages to offer foreign in question, and companies' profits therefore mining investors, most important of which is a very had been relatively modest (according to del favorable geology, but also good infrastructure Pino et al., 2005, p. 49 the average rate of return with short distances to ports, a favorable on equity and on total assets of the ten largest climate with extremely low rainfall in the main foreign mining companies during the period mineralized zones (which simplifies environmental 1999-2003 was respectively 14.5 and 5.7%, which, management), and stability leading to low country however, was higher than mining and metals risk. The taxation system is, however, an important companies in the United States, at 6.3 and 3.1%). attraction. It is ranked among the most competitive ● Most of the large foreign owned mines began in the world, as has been shown by Otto (2000). production during the 1990s, and consequently, Chile also has in force Double Tax Treaties since they had mostly used the possibility of accelerated depreciation offered by the law, they

incorporation mainly intended for smaller companies. Most large foreign mining investors use the second form of incorporation. The main difference 48 The debate was sparked by the sale in 2002 of the Mine Disputada de is that under the latter form of incorporation, remittances corresponding Las Condes for a sum of US$ 1,500 million by its owner, Exxon, to Anglo to financial income are not taxed if they exceed the “taxable profits fund American. No tax had ever been paid by Exxon and since the sale took place (FUT)”, which consists of accumulated taxable profits with deduction for outside Chile, Exxon’s income would not be subject to capital gains tax taxes paid (del Pino, 2004, p. 16-17). The WHT on such remittance will be (Ministerio de Minero de Chile, 2005, p. 6-7). deferred and paid once the FUT becomes positive. 49 del Pino et al, 2005 p. 240. 45 Pursuant to the Law 19,753, Published at the Official Gazette on 50 Codelco has a special tax regime, under which, in addition to first September 28, 2001 the First Category Tax Is 17% since January 1, 2004 category tax, it pays a 40% tax on profits (this is a tax on public enterprise 46 del Pino et al, 2005, p. 255. profits). It also pays 10% of its copper sales revenues to the armed forces 47 del Pino et al, 2004, p. 19. (del Pino et al., 2005, p. 245).

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 54 had had very low taxable profits; tax payments while the rest will finance development in the 55 would increase once the possibility to use regions where mining takes place52. accelerated depreciation had been exhausted, as it would shortly be in most of the mines.51 According to calculations made by del Pino et al. (2005, p. 256), the new tax will generate US$400 During the course of the debate, several proposals million in additional government revenue over the were made to raise government revenue from period 2006-2010. Del Pino et al. calculate that foreign mining investment. total tax revenue from the ten largest foreign owned mining companies will be US$4,356 million over ● A first government proposal failed in July 2004 this period, or US$871 million per year on average. to achieve the necessary qualified majority in The increase from earlier years is mainly due to the Chamber of Deputies (the lower house of the fact that investments will be depreciated (the Parliament). assumption for copper prices is 93 cents per pound, ● A second proposal was passed in April 2005 and compared to 92 cents 1991 to 2003, and 130 cents in became law in June 2005 (Law 20,026 Specific 2004). Mining Tax). 5.2.5 Environmental Regulations In general terms, the bill imposes a tax on mining activities based on 5% of the value of The environmental law dates from 1994 (Ley 19.300) the operating taxable base for all Chilean mines and is modern in its approach. It contains standard whether foreign or domestic owned. For copper mechanisms and instruments for the approval mines, production thresholds to exclude certain of projects and for monitoring of environmental 53 medium mining companies have been introduced effects . as follows: companies with sales lower than 12,000 metric tones are exempt, and sales within 12,000 5.2.6 Summary tones to 50,000 tones pay progressive rates up to 5%. Operating taxable base excludes interest Chile’s mining legislation dates to 1983 when expense, accumulated tax losses, accelerated tax it was introduced by the Pinochet Government depreciation and applies six year amortization (not to attract foreign direct investment. Contrary to upfront deductions) for start up and organization other mining countries (e.g. Ghana, Tanzania and costs. to a lesser extent Peru) where changes in legal stipulations led to a subsequent increase in foreign The tax will apply on income as of January 1st 2006 direct investment in the mining sector, this did not and will be due jointly with the yearly Chile income immediately take place in Chile. State-ownership tax return in April 2007. Taxpayers subject to this of the mining industries dominated for almost mining tax must make advance provisional tax another two decades before foreign privately owned payments on account of the yearly tax, based as enterprises started to compete with the national a percentage of gross revenue. If the percentage mining industry. Thus, the Chilean experience cannot be determined, the rate will be 0.3%. The defies the argument that good geological prospects rate is adjusted every year by the percentage and the introduction of competitive mining prepayments exceeded, or where less than the final legislation is suffice to stimulate investment in tax due. the sector. And although Chile’s nationally owned mining industry is no longer dominant, it remains Payment of the mining tax is to be deductible for one of the larger (and important) producers. Chilean first category tax (FCT) purposes. In the context of this case study, disputes over Companies with tax invariability agreements are the legitimacy of mining legislation have not subject to special provisions. featured as a matter of concern. Recently there has been a national debate on whether Chile’s tax It is expected that most of the revenue from the tax, legislation for the mining sector is adequate, and or 85%, will go to a special fund to finance research, if there is scope to increase government’s tax take 52 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 51 According to del Pino et al., 2004, p.18, the accumulated deferred tax main arguments used by the Government for the tax (Ministerio de Minería due to accelerated depreciation by the ten largest foreign owned mining de Chile, 2005, p. 8). companies was US$ 759 million at the end of 2002. 53 See www.cochilco.cl for the full text.

54 from privately owned mining companies. These taken over and have sometimes been coupled 55 debates are part of Chile’s democratic process. with an explicit anti-party attitude55. The new Mining investors have to rely on this process, and political focus appears to lie on maintaining a basic for Chile’s legislators to derive at a tax policy that consensus that democratic rules should govern strikes an adequate balance between the funding the interactions of those who represent citizens in needs of the public sectors and political and the National Congress. The pre-1973 experience business interests of the private sector. Chile’s high with democracy and the negative experience of the ranking on international tax competitiveness does military dictatorship also appear to have enhanced not suggest that some change to Chile’s current general acceptance of basic democratic values tax legislation will fundamentally deter investors’ within society. Political participation is less client- interests in the country’s natural resource deposits. focused and populist than in many other Latin American countries, and has come closer to the 5.3 The Political-Administrative System forms found in Western Europe. Observers note that popular participation in parties and unions has Chile’s contemporary political-administrative decreased, particularly compared to the pre-1973 system is based on partial reforms in 1989 of the situation. The existing party system has become Constitution introduced by the Pinochet Regime more autonomous and distanced from society and in 1980. These reforms prepared for the transition its people. At the same time is has become an elite to a civil government after in 1988, the military instrument to ensure efficient political decision- regime had lost a plebiscite on the continuation of making. its rule. Chile’s constitution sets out a presidential democracy where the directly elected president 5.3.1 The Executive heads the State, the Government and the Administration. The president ensures the country’s Typical for a Latin American presidential internal order and external security. The following democracy, Chile’s political system vests Sub-Sections describe various aspects of Chile’s considerable powers in the presidency, and 54 political administrative system . Most recently compared to the presidential system of the US it th (on September 17 , 2005), the Chilean Congress allows the Legislature (the National Congress) only has enacted various changes to the Constitution, a rather limited role. But despite strong executive revising a number of institutional features enacted powers, the Chilean presidency and its government by the outgoing Pinochet regime in preparation for require majorities in the legislature to govern the return to a civil government. by democratic legislative processes rather than executive degrees. Since the political transition in Political observers have noted that Chile’s political 1990, Chile’s centre-left presidents have depended culture has changed fundamentally from what it on support by the moderate right to get legislative had been prior to 1973 and how it was until the approval for government policies. In practice late 1980s. (Annex 3 provides a brief summary of electoral rules, the structure of the legislature and Chile’s recent political history.) Until 1973 society the distribution of political parties have shaped was divided into different political camps and party how consensus has been forged across the political politics was the deciding factor of government spectrum from left to right. policies. With industrialization and the expansion of suffrage during the period from 1930s to the 1970s Box 5.1 describes constitutional examples of parties to the left of the political spectrum gained executive strength over the National Congress, importance. Historians link the inability to forge prevailing during the 1990s. a stable consensus among increasingly diverse social interests as a reason for the breakdown of 5.3.2 The National Congress – the Chamber of democracy in Chile in 1973. Deputies and the Senate Ideological polarization still featured until the The Chilean legislature – the National Congress end of the 1980s, although it was militarily - consists of two houses, the Chamber of Deputies suppressed. Since the late 1980s, however, political and the Senate. This bicameral system had already moderation and pragmatism are said to have been set out in the 1925 Constitution and has been retained in two constitutional reforms, 1980 and 54 Large parts of this chapter are based on Chile – a country study: http:// www.country-data.com/frd/cs/cltoc.html 55 Sperberg, 2003

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 56 Box 5.1 Executive strength in Chile Box 5.2 The Chamber of Deputies and the Senate 57

Original constitutional provisions of 1980 bar the second In 1980 the Chamber of Deputies has been reduced to 120 house – the Senate - from exercising oversight of the members - 2 for each of the 60 congressional districts executive branch or expressing opinions on the conduct – each serving for four years. The Senate has 38 members, of government. The constitution of 1980 also severely who serve eight-year terms, with half of the body coming limited the role of Congress in legislative matters up for election every four years. In contrast to the age relative to earlier legislatures in Chilean history. Article requirement of 20 for deputies, senators must be at least 62 states that “the President of the Republic holds 40 years old. High-level government officials, including the exclusive initiative for proposals of law related to ministers, judges, and the five members of the Central changes of the political or administrative division of the Bank Council, are barred from being candidates for country, or to the financial or budgetary administration deputy or senator until a year after they leave their posts. of the State.” Article 64 of the constitution also restricts Leaders of community groups or other associations also the budgetary prerogatives of the legislative branch. are not permitted to become candidates unless they give Constitutional amendments in 1989 at the transition to up their posts. democracy removed the provision that bared the Senate from exercising legislative oversight and also eliminated The Chamber of Deputies carries out its duties by means the president’s power to dissolve the first house – the of 13 permanent commissions, each composed of 13 Chamber of Deputies. deputies. The Senate has 18 commissions, each with 5 members. Most of the commissions correspond to a In several areas the President retains sole authority ministry responsible for a similar substantive area. Mixed to introduce bills. These include measures involving commissions, composed of members from both houses, spending, changes in the duties and characteristics of are charged with resolving discrepancies between the public-sector administrative entities, modifications to the houses on particular pieces of legislation. political-administrative configuration of the state, and initiatives related to collective bargaining. The president However, throughout the first two quarters of can also call the legislature into extraordinary session, th at which time the legislature can only consider legislative the 20 century, the Chilean Congress remained and treaty proposals introduced by the president. The a critical arena for the formulation of national president may grant certain initiatives priority status, policy. It served as the most important institution requiring that Congress act within three, ten, or thirty for cross-party bargaining and consensus building days, depending on the degree of urgency specified. In this in Chile’s otherwise fragmented political system. sense, the president has the exclusive power to set the legislative agenda and, therefore, the political agenda. In Congress produced fundamental legislation, such a further restraint on legislators, the 1980 Constitution as laws establishing social security (1924), the permits the Constitutional Tribunal to remove a senator Labor Code (1931), the minimum wage (1943), or deputy from office if he or she “permits the voting of Corfo (1939), restrictions on the PCCh (1948), and a motion that is declared openly contrary to the political agrarian reforms (1967). The National Congress has constitution of the State by the Constitutional Tribunal”. resumed this role since the return to democracy. Congress is limited in its ability to act as a counterforce Box 5.2 gives further details on the Chamber of against the President’s power in matters dealing with the Deputies and the Senate. 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 5.3.3 Political Parties and Electoral Rules assembly, emergency, or catastrophe solely with the approval of National Security Council (Conesa). The party system that arose after 1990 is the result of Chile’s political history since the early Source: http://www.country-data.com/frd/cs/cltoc.html 1970s and the regulations of the 1980 Constitution. In the 1960s the practice of coalition building 1989 respectively. The Chilean legislature looks that previously governed inter-party relations back to a long history. In the 19th century it had been transformed to that of polarized pluralism which considered one of the strongest legislative bodies in lead to increased confrontations and culminated in the world. Limitations to congressional prerogatives the military coup in 1973. Although after the return were introduced in 1925 and subsequently to democracy the divisions between right, middle characterized Chile’s political system as one of and left parties have remained, there are now more Latin America’s strong executive systems. These than three parties competing for votes. limitations included the legislature’s power over budget laws and giving the President considerable Chile’s bi-nominal electoral system exercises a legislative powers, including the right to designate significant impact on the party system. It forces particular legislation as ’urgent’. parties to form alliances in order to increase

56 electoral chances. For small parties this is the guaranteeing judicial independence. The justice 57 only chance to ensure minimal presentation56. The system is considered one of the best on the South electoral system also favors the second strongest American continent, despite a serious lack of political power in a constituency, because of the resources and inadequate judicial access for poor rule that two candidates from the same party can citizens. only win the second seat in a constituency if their share of votes exceeds two thirds. This favors the In the political climate before 1973, the Supreme right-wing opposition. Quite importantly, it provides Court was viewed as a conservative and inflexible incentives for the governing left to seek consensus power, obsessed with a literal definition of a with the opposition on the right to enhance the law designed to protect the privileges of private possibility that legislative proposals can be passed property. The Supreme Court, however, rightly saw in the National Congress. its task as following the dictates of the law and not to change it to suit political objectives. The military While these incentives may not be considered regime left the court system virtually intact. The positive from the domestic political perspective, courts eventually accepted the legitimacy of the observers note these as important in explaining military junta as the new executive and legislative 57 Chile’s consensual public policy making process . power and adjudicated matters in conformity There have been a number of attempts to change with the new decree laws, even when the latter the Constitution and the electoral system. Until very violated the spirit and letter of the Constitution. For recently these have failed, precisely because of the example, human rights violations were deferring to way political power is shared across the political the military and security services. spectrum. Relations between the new democratic Government th However, on September 17 2005, the Chilean and the Supreme Court were initially tense, not Congress enacted an amended version of the least because the outgoing regime had ensured the previous Constitution, removing what President appointment of relatively young and conservative Ricardo Lagos called the “authoritarian enclaves” judges but also because of the Supreme Court’s left in place by the dictatorship in order to complete disregard for human rights violations perpetuate the armed forces’ political power after under the military Government. Attempts to 58 civilian Government was restored . The electoral introduce constitutional reform legislation in the system is no longer written into Constitution and early 1990s failed, not achieving the necessary thus will be easier to change in the future. It is yet majority in the Congress again for the institutional too early to say what effect these amendments reasons outlined above. Some were concerned will have on policy consensus building across the that had these changes gone through, the judicial broader political spectrum. system would have become more politicized. 5.3.4 The Judiciary59 5.3.5 Sub-national Government Entities Chile’s judicial system is based on Roman law and Chile is organized in 13 administrative regions Spanish and French traditions, particularly the from north to south. In the early years of nation- Napoleonic Code. After independence it acquired state formation, Chile had adopted a unitary a reputation for independence, impartiality, rather than a federal system. Regional and local and probity, but fell into some disrepute during governments have been entities under national the parliamentary republic from 1891 to 1925, authority and subject to the legislative powers when it became part of logrolling and patronage vested in the central Government. Over the years politics. The 1925 constitutional reform aimed at local governments have enjoyed varying degrees of depoliticizing and improving the judicial system by self-determination and autonomy. 56 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). From the onset Chile’s Constitution catered for 57 Siavelis, P (2002): Exaggerated Presidentialism and Moderate Presidents: local municipal councils to be elected through Executive-Legislative Relations in Chile; Carey J. (2002): Parties, Coalitions, and the Chilean Congress in the 1990s. direct popular vote. During much of the nineteenth 58 The Economist (2005, September 15th): Democratic at last – Cleaning century, local governments were barely able to up the Constitution; also The Economist (2004 – October 21st): Chile’s new constitution – untying the knot. provide the minimal services they were charged 59 This section draws on material from the US Library of Congress. with, such as the maintenance of public order and

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 58 basic sanitation, given the scarcity of resources. Although this scheme would make local authorities 59 Towards the end of the century, however, the highly dependent on appointments from above, country embarked on a bold experiment, providing the military Government also took an important significant local autonomy to the nation’s elected step to decentralize state functions by giving local municipalities, many of which flourished under administrative units greatly increased resources local leadership with local resources. The center and autonomy to make local governments viable. A of gravity of Chilean politics shifted toward local notable example was the decision to give municipal governments and their allies in Congress. governments far more responsibility for elementary and secondary education and other local services. The 1925 Constitution sought some corrections A decentralization process was started half- to this experiment by increasing the oversight of heartedly at the beginning of the 1980s and has local authorities through the creation of elected been maintained since the 1990s. Subsequently, provincial assemblies. However, the legislation democratic governments have been concerned with that would have made those assemblies a reality reintroducing the democratic legitimization of local was never adopted. Instead, oversight functions political bodies. were turned over to appointed agents of the central Government. During the dramatic expansion of the Many shared the view that part of the country’s national state in the wake of the Great Depression, tradition of elected local governments should be local governments were left behind. The authorities restored. In November 1991 a constitutional reform of the central Government routinely kept tax law (changed in 2004) paved the way for municipal revenues, which by law were meant to be returned election since June 1992. Local governments are to local governments. The essence of local politics now formed by a municipal council and a mayor who serve four-year terms. The mayor is directly became a struggle to use party and patronage elected and the councilors are elected through a networks to extract resources on a preferential proportional representation system. Candidates basis for local development. As the nation’s must be sponsored by registered political parties electorate expanded, local government officials that obtained at least 5% of the vote in previous played an increasingly important role as electoral contests. The number of councilors varies, from six agents. Mayors and councilors became political in smaller municipalities to ten in the larger ones. brokers seeking to exchange votes for a water The law bars government officials and members treatment plant, a stretch of highway, or jobs for of Congress from running for local office. The constituents. Elections for local office were as hotly mayor’s responsibility is to propose a communal contested as elections for national office and served plan, a budget, investment programs, and zoning as building blocks of party development. plans to the municipal council for approval. The mayor also appoints delegates to remote areas of The military regime viewed the somewhat the community. The municipal council approves fractious state of local politics as proof that local ordinances and regulations and oversees parties and politicians were incapable of efficient the work of the mayor, being authorized to call administration. As a result, it designed a system of to the attention of the controller general any local administration distinctly based on corporatism irregularities. and heavily dependent on direct appointments from the center. According to the Constitution of Most of the municipal resources come from the 1980, regional and local governments would be Common Municipal Fund, administered by the administered by intendentes and mayors, who Ministry of Interior. This Fund endeavors to favor would be appointed directly by the President of poorer areas in the distribution of resources the Republic. The mayors of smaller towns would for local government. The law on municipalities be designated by regional councils created to also calls for the creation of an economic and advise the intendentes. The regional councils social council in each municipality. This is an would be formed by employees of state agencies advisory body constituted by representatives of in the locality, military officers, and designated local, organized groups, including, for example, representatives of interest groups with no party neighborhood associations and other social and affiliation. This conception of regional government voluntary organizations. Municipalities have sole would be extended to the municipal level with responsibility for the provision of local public order similarly designated local councils. and public services and work closely with state

58 agencies on a host of other matters, including 5.4 Fiscal Issues, At the National and 59 public health and education. They are authorized to Sub-National Level create administrative units to oversee each of these activities. The third column of the revised governance taxonomy focused on fiscal issues. The desk based 5.3.6 Summary nature of this country case study has not allow for a detailed analysis of Chile’s fiscal system at the Although in institutional terms the Chilean political- national and sub-national level as conducted for the administrative system grants the presidency great Ghana, Peru and, to a lesser extent, the Tanzania powers, the president still needs majorities without case study. It is most important, however, to take 60 which his scope of activity is limited . This has note that Chile does not operate an institutionalized applied particularly to the efforts of the Government mechanism of redistributing revenue received from to further reform the 1980 Constitution and to mining to those regions where mining activities remove the enclaves of authoritarianism. Such has are undertaken. Instead, sub-national funding been achieved only most recently, in September appears to be allocated through the budget process 2005. Until then the paradoxical constellations in managed at the central government level. In this, the Chilean presidential system regarding distorted Chile is distinct from Ghana and Peru, both of whom majorities in both chambers has been such that practice formula based revenue redistribution the president has depended on the moderate schemes. These appear to be subject to the right. Thus the incentives have been to build broad politicization of resource allocation and do not based consensus before the executive sought the strike to constitute particular efficient systems of Congress to legislate on policies. sub-national financial management.

In summary, despite the institutional predominance Box 5.3 summarizes the evaluation of Chile’s of the executive on the surface, the legislature has aggregate fiscal performance as assessed by the played a real and important role in Chile’s political 61 IMF’s standardized Report on the Observance of processes . This would be overlooked if one merely Standards and Codes (ROSC) and the Article IV considered the formal balance of political power Consultations. between the branches of the political system and neglected the inter-branch connections. The 5.5 Social Cohesion: Social Tensions, balance of inter-branch powers has depended not Conflict Prevention and Conflict Mitigation on the institutional set-up but the party distribution of seats, the partisan power of each branch of The fourth column of the revised governance the political system and the nature and extent of taxonomy raises the subject of social cohesion, in presidential support in the Congress. particular, to what extent mining activities raise Political observers argue that since the restoration social tensions requiring the prevention of conflicts of democracy, Chile’s presidents have been or their mitigation. In the context of this Chile able to successfully pursue their legislative study, there are no particular concerns with mining agendas, not because of the extraordinary powers activities undermining social cohesion. In part this constitutionally vested on them, but because the is explained because many mining operations take modus operandis has included incentives that place at considerable distances from communities proposed a cooperative style of government, where and settlements. Furthermore, it would appear the legislature has been influential despite its that Chile’s political institutions are well poised superficially limited role. In this practice Chile has and enjoy sufficient legitimacy to deal with distinguished itself from other Latin American contentious issues in a democratic manner, which presidencies, where legislatures have been does not cause the need for conflict prevention perceived as mere ‘rubber stamping’ entities or and mitigation outside of the realm of the official even as an impediment to the efficient execution of governance system. economically sensible presidential policies. 5.6 Private Sector Development and Human Capacity Development

60 Jaime Sperberg (2003), page 34. In accordance with the fifth column of the revised 61 This conclusion draws on Siavelis (2002) governance taxonomy, this sub-Section assesses

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 60 Box 5.3 Chile’s public financial management system private sector and human capacity development 61 issues. Two aspects appear to be of particular The 2005 IMF article IV consultation report commend the relevance in understanding Chile’s achievements Chilean Government on its prudent fiscal policies within in poverty reduction and its recent economic the context of a sound and consistent policy framework. diversification: The 2005 ROSC update stresses a high degree of fiscal transparency and new initiatives to provide improved ● Section 5.6.1 looks at labor market changes; and information on extra-budgetary operations. ● Section 5.6.2 summarizes changes in land An important element in Chile’s public financial ownership and policies and their effect on the management system is its structural surplus rule development of commercial farming activities. introduced in 2000. This rule targets a cyclically adjusted fiscal surplus of 1% of GDP in the public accounts. The aim 5.5.1 Chile’s Labor Markets is to provide an effective countercyclical stimulus to the economy, and over the past couple of years this appears Despite the impressive overall reduction in poverty to have worked. Under the rule, the Government saves levels, unemployment has remained an issue all copper revenues from Codelco above a long-term in Chile. Pre 1973, the Trade Unions had been reference price for copper. Other central government powerful and maximizing employment had been a revenue is smoothed over the business cycle, using an key part of economic strategy, not least by using the estimate of potential output. Two independent panels of public sector to reduce unemployment. In 1979, the experts (each including 12-14 experts) are consulted on the determination of the respective structural revenue labor laws were modified in an attempt to increase estimate. The budget law then sets an aggregate central flexibility and reduce labor costs as a means to government expenditure ceiling, which is 1% of GDP below reduce Union power. In particular, it was seen that this structural revenue. there was to be a trade off between inflation and employment such that a 1% reduction in inflation The structural surplus rule has provided a useful tool increased unemployment by 10%62. These changes for policy making for budget preparation helping to set led to considerable unemployment and uncertainty revenue targets and expenditure ceilings. Recently, higher within the labor force. In 1990, the labor laws revenue from increases in copper prices have brought were revised again, but this time with the intention about overall surplus, which have been sterilized and used of generating greater stability and certainty for selectively to repay public debt. When economic growth is workers. For example, “non-justified” dismissals below trend such as between 2000-2003, the rule allows the Government to run deficits. have been prohibited.

The rule has also increased transparency in aggregate Employment increases since the early 1990s have fiscal policy making. It gets noted, in particular, that in been an important reason for the reduction of recent years the rule has brought greater transparency poverty. The unemployment rate declined from 8.3% and discipline to military spending for which transfers in 1990 to about 5.7% in 199663. However, in times of from the Codelco have been earmarked. Initiatives are crises, employment does suffer. In the 1998 crisis, said to be under way to further formalize the rule to unemployment increased from 6.1% in 1998 to over improved decision making, for example, on contingent 9% by 2000. Such fluctuations affect, in particular, liabilities such as pension obligations. Although there the urban poor who are employed in ‘precarious’ are congressional and presidential elections scheduled working relationships as well as very low incomes for December 2005, there is little doubt that political consensus on fiscal prudence remains strong. in the informal sector. Compared to other Latin American countries, however, the size of Chile’s The annual submission of the budget to Congress is informal sector is much smaller. This has probably companied by a Report on Public Finances, specifying in made efforts to reduce poverty considerably easier detail various aspects of public finances. The submission to implement and is also likely to have improved of this report is required by the country’s Financial their effectiveness. Moreover, the relatively small Management Law. size of the informal sector allows a broader tax More than ¾ of government entities are linked up to base with correspondingly less risk of misallocation a financial information management system, which is effects from taxation measures. 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. 62 ILO (2003) 63 Sperberg, p. 83.

60 Continued growth in the Chilean economy has towns as well as better access to schools and other 61 meant that unemployment has become much less sources of employment. By the 1980s the rural of an issue than in earlier periods. Changes to population had caught up in universal literacy. Since labor legislation in 2001 were aimed at increasing the bargaining power of government. In 2002 Chile the 1990s, Chile has established a visible presence was the first country in Latin America to introduce in various international agricultural export markets. unemployment insurance64.

5.5.2 Land Titles and Land Reform65

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 small-

64 Bertlesmann (2003) 65 This section lends from the US Library of Congress, http://countrystudies. us/chile/41.htm

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 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 spending is allocated to regions on the basis of 65 and policies at the national level, it is not an needs as perceived by the central Government and exaggeration to say that Chile provides an example this policy appears to be relatively uncontroversial of how to deal with the challenges of dependence (although, obviously, the population of mining on mineral exports. The following aspects of the districts would prefer to keep a larger share for Chilean experience are important: themselves). The highly positive economic and social development in Region II has by and large

● Since the 1980s, Chile has practiced cautious come about as a result of strong economic growth, and appropriate policies that have allowed the reinforced by close linkages between the mining country to retain macroeconomic balance in industry and other sectors of the local economy. spite of considerable variations in mineral export These linkages have been promoted by the mining revenues and a pronounced boom in mining companies, in particular Escondida, and it is likely investment. that they would have been considerably weaker ● The macroeconomic success has allowed Chile without this active promotion. The efforts to build to achieve export diversification, particularly linkages do, however, go beyond simply nurturing into agricultural products, and to reduce its suppliers on an individual basis. The mining cluster dependence on copper exports, which is a in Region II (which, although it is concentrated to significant feat in view of the rapid growth of that region is not limited to it) was a joint initiative mineral exports. by the national Government and the mining companies in Region II, with Escondida being the ● High and broad based economic growth has resulted in strong employment growth and, main driving force on the industry side. It has together with government social expenditure, focused not just on adapting suppliers' practices to the needs of their Region II customers, but particularly on housing, this has driven down on raising their competitiveness in international poverty levels. markets by supporting their efforts to get ISO 9000 ● The public sector has benefited from high and 14000 certification. This is a more long range revenues from mining, which have allowed the strategy than one might normally expect. country to invest in human capital building,

as exemplified by the doubling of government The vision for the economic future of Region II expenditure on education. has not been clearly articulated, possibly because ● The Copper Stabilization Fund has played neither the Government nor the companies see any a crucial role in smoothing fluctuations in need for a long-range strategy at the moment. The government expenditure, thus helping to provide question that could be asked is whether Region II the steady levels of funding necessary for will continue being a mining region or will it have a sustainable social programs. more diversified economic structure in the future. ● At present, Chile is faced with the need to As long as the region continues to attract mining diversify into more skill and knowledge intensive investment at the present rate, the answer to this industries, particularly since rising real wages question will have to be postponed. are reducing the country's competitiveness in labor intensive sectors and the natural resource The problem that was posed at the beginning of based sectors will not generate sufficient the work on the Resource Endowment initiative employment; its great advantage is that, with was why some countries navigate safely around government revenue from mining expected to the obstacles to economic development that increase considerably in the future, Chile faces face mineral dependent countries while others less of a budgetary constraint in raising levels of capsize. In the case of Chile, an important part expenditure on higher education and research of the answer appears to be an atmosphere of than other countries at its income level. Chile cooperation and compromise between different should be able to successfully manage the actors in society. This cooperation and compromise transition from ‘Latin American problems’ to is most important and visible between government ‘European problems’. and industry, but also exists with other parts of civil society, including universities and associations At the regional level, it is worth emphasizing that in crucial supporting roles. The deeper question, Chile has done without any mechanisms to recycle therefore, is whether such an atmosphere can be government revenues from mining back to the replicated in countries that have not been lucky mining regions. Instead, national government enough to acquire it by other means.

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The Challenge of Mineral Wealth: using resource endowments to foster sustainable development Acknowledgments 68 869 8. Acknowledgments

70 ICMM team (Newmont), Tim Baker (Placer Dome), Britt Banks 71 Kathryn McPhail led the initiative under the (Newmont), Fred Bantubonse (Chamber of Mines direction of John Groom and Paul Mitchell, with Zambia), Stan Batey (Freeport McMoRan), Roger valuable support from Liz Cohen and Victoria Baxter (Chamber of Mines of South Africa), Edward Howse. Guidance was provided by Wayne Murdy, Bickham (Anglo American), Steven Botts (Compañia (Chair, ICMM and Chairman and Chief Executive Minera Antamina S.A.), Reinoud Boers (Mining Officer, Newmont Mining Corporation), Sir Mark Industry Associations of Southern Africa), Jim Moody-Stuart, (Chairman, Anglo American plc), and Cooney (Placer Dome), Nicolas di Boscio (Rio Tinto), Paul Skinner, (Chairman, Rio Tinto plc). The entire Ian Emsley (Anglo American), Dorothy Gyamfi ICMM team thanks all the individuals, governments (Newmont), Paul Hollesen (AngloGold Ashanti), and organizations that contributed to the study as Emmanuel Jengo (Chamber of Mines of Tanzania), listed below. Niks Lesufi (Chamber of Mines of South Africa), Holly Lindsay (BHP Billiton), Helen Macdonald Consulting team (Newmont), Greg McNee (Placer Dome), Jim Miller The main contributors to this case-study were (Freeport McMoRan), Sixtus Mulenga (Konkola Olle Östensson (UNCTAD) and Ian Emsley (Anglo Copper Mines plc), Richard Ness (Newmont), American). Additional contributions were made by Gordon Peeling (Mining Association of Canada), Evelyn Dietsche (OPM) and Paul Stevens (Professor Dave Rodier (Noranda), Eduardo Rubio (Minera of Petroleum Policy and Economics, University Quellaveco S.A.). of Dundee. Aidan Davy (independent consultant) and Daniel Litvin (independent consultant) also International Advisory Group contributed to the case-study. Georg Kell (Executive Head, United Nations Global Compact Office), Pedro Pablo Kuczynski Country Contributors (Minister of Economy and Finance, Peru) (until Government of Chile, including authorities in 2005), Hon. Mamadou Lamine Loum (Independent Santiago and Antofagasta and representatives consultant and former Prime Minister of Senegal), of local government in Antofagasta; Escondida Warwick McKibbin (Executive Director Centre for management in Santiago and Antofagasta Applied Macroeconomic Analysis and Professor of (including Mauro Valdes and Jorge Zeballos; BHP International Economics, Research School of Pacific Billiton, a 57.5% shareholder in Escondida (Holly & Asian Studies, Australian National University; Lindsay); management of the Escondida foundation; Member, Board of the Reserve Bank of Australia), representatives of Escondida labor unions; local Hon. Felix Mutati (Deputy Minister of Finance and NGOs and community groups; national universities National Planning, Republic of Zambia), Jane in Santiago and Antofagasta; representatives of Nelson (Director, Corporate Social Responsibility business associations in Antofagasta, including Initiative, Kennedy School of Government, Harvard representatives of small scale miners association; University and Director, Business Strategy, representatives of other mining companies; and International Business Leaders Forum). suppliers to Escondida. Partners Country Case Studies Peer Review Team United Nations Conference on Trade and Glen Armstrong (Sustainable Finance), Aidan Development: Olle Östensson World Bank Group: Davy (independent consultant), Kathryn McPhail Craig Andrews, Clive Armstrong, Kent Lupberger, (ICMM), Andrew Stoeckel (Centre for International Rashad Kaldany, Leo Maraboli, Meg Taylor, Peter Economics, Adelaide), Warwick McKibbin (Executive Van der Veen. 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).

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 70 971 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 73 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 Destination country 1998 2003 China 3.2 17.9 Commodity 1991 2003 Italy 12.0 13.1 Copper in concentrates 18.8 28.7 France 7.2 9.8 Copper as metal 62.9 59.6 Republic of Korea 6.3 9.2 Gold 8.8 3.4 United States 7.8 7.6 Iron ore and concentrates 3.4 1.7 Brazil 5.9 5.1 Silver 1.3 1.1 Netherlands 2.8 4.9 Other base metal concentrates 2.2 3.7 Mexico 5.1 3.8 Precious metal concentrates 1.2 0.5 Japan 6.1 2.5 Other minerals and metals, 1.3 1.3 including non-ferrous scrap Germany 5.1 2.4 United Kingdom 16.2 2.1 Source: UNCTAD secretariat calculations, based on national trade statistics 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 statistics concentrates in 1998 and 2003, by value, percent of total

Destination country 1998 2003 Table 9.4 Average income by economic activity in Chile, October-December 2000, Chilean pesos Japan 39.2 34.6 Men Women Total China 8.4 15.9 Total 304’181 209’081 271’393 Republic of Korea 3.3 11.3 Agriculture, Fishing 155’064 124’484 151’532 Germany 7.0 8.1 Mining 581’844 341’533 564’641 India 1.9 7.8 Manufacturing Brazil 6.7 6.0 Industries 266’985 168’092 239’563 Spain 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 Transportation, United States 5.3 0.4 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 Development Goals (MDGs). The MDGs are depicted for Chile in the box below and thereafter described in further detail. This Sub-Section of Annex 1 summarizes Chile’s performance with respect to the Millennium

72 73 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 74 9.2.1 Millennium Development Goals in Detail Goal 2: Achieve universal primary education 75

Goal 1: Eradicate Extreme Poverty and Hunger Target 3: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full Target 1: Halve, between 1990 and 2015, the course of primary schooling proportion of people whose income is less than one INDICATORS: dollar a day. (3a) Net enrolment ratio in primary education INDICATORS: (TARGET: 100% by 2015) (1a) Proportion of population below $1 per day (3b) Proportion of pupils starting grade 1 who reach (TARGET: under 1% by 2015) grade 5 (TARGET: 100% by 2015) (1b) Poverty Gap Ratio [incidence x depth of poverty] (3c) Literacy rate of 15-24 year olds (TARGET: 100% – lack of data by 2015) (1c) Share of poorest quintile in national TARGET 3: Ensure that by 2015, children everywhere, boys and girls alike, consumption – lack of data will be able to complete a full course of primary schooling

NET ENROLMENT RATIO IN PRIMARY EDUCATION TARGET 1: Halve between 1990 and 2015, PROPORTION OF PUPILS STARTING GRADE 1 WHO REACH GRADE 5 the proportion of people whose income is less than one dollar a day 100 LITERACY RATE OF 15-24 YEAR OLDS MDG TARGET 90 PROPORTION OF POPULATION BELOW $1 PER DAY MDG TARGET for 2015 7 80 ) "Poverty Gap Ratio" and "Share of Poorest 70 6 Quintile in National Consumption have been 60 5 50

Percentage (% 40 4 30

Percentage 3 20 10 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1

0 Source: United Nations, Millennium Development Goals Indicators 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 NOTE: 1(b) and 1(c) excluded due to lack of data Women

Target 2: Halve, between 1990 and 2015, the Target 4: Eliminate gender disparity in primary and proportion of people who suffer from hunger. secondary education preferably by 2005 and to all INDICATORS: levels of education no later than 2015 (2a) Prevalence of underweight children (under-five INDICATORS: years of age). (TARGET: under 5.4% by 2015) (4a) Ratio of girls to boys in primary, secondary and (2b) Proportion of population below minimum level tertiary education (TARGET: to reach 1 by 2015) of dietary energy consumption (TARGET: under 21% (4b) Ratio of literate females to males of 15-24 year by 2015) olds (TARGET: to reach 1 by 2015) (4c) Share of women in wage employment in the TARGET 2: Halve between 1990 and 2015, the proportion of people who suffer from hunger non-agricultural sector (TARGET: to reach 50% by 2015) 9 PREVALENCE OF UNDERWEIGHT CHILDREN (under-five years of age) PROPORTION OF POPULATION BELOW MINIMUM LEVEL OF DIETARY ENERGY CONSUMPTION (4d) Proportion of seats held by women in national 8 Linear (TARGET - PROPORTION OF POPULATION BELOW MINIMUM LEVEL OF DIETARY ENERGY CONSUMPTION) Linear (TARGET - PREVALENCE OF UNDERWEIGHT CHILDREN (under-five years of age)) 7 parliament (TARGET: to reach 50% by 2015) Due to lack of data: 6 (1) "Reds" Target from 1994 (2) "Blues" Target from 1991 5

Percentage 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.

74 TARGET 4: Eliminate gender disparity in primary and secondary education TARGET 6 : Reduce by three-quarters, 75 preferably by 2005 and to all levels of education no later than 2015 - 4(a) and 4(b) between 1990 and 2015 the maternal mortality rate PRIMARY SECONDARY RATIO OF LITERATE FEMALES MDG TARGET TO MALES OF 15-24 YEAR OLDS 70 MATERNAL MORTALITY RATIO 1 MDG TARGET (Reduce the 1990 level by 3/4's for 2015) 60 0.9 0.8 50 0.7 0.6 40 0.5 30 0.4 0.3 20 Ratio of Female to Males 0.2 10

0.1 Maternal Mortality Rate (per 100,000 births) 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 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 Target 5: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate Target 7: Have halted by 2015, and begun to INDICATORS: reverse, the spread of HIV/AIDS (5a) Under-five mortality rate (TARGET: To get (7a) HIV prevalence among 15-24 year old pregnant below 26.4 deaths per 1000 live births by 2015) women – lack of data (5b) Infant mortality rate (TARGET: To get below 20 (7b) Contraceptive prevalence rate deaths per 1000 live births by 2015) (7c) Number of children orphaned by HIV/AIDS (5c) Proportion of 1 year-old children immunized – lack of data against the measles – no verifiable target NOTE: 7(a) 7(b) and 7(c) excluded due to lack of data 5(c) excluded due to lack of suitable target Target 8: Have halted by 2015, and begun to reverse, the incidence of malaria and other major TARGET 5: Reduce by two-thirds, between 1990 and 2015 diseases the under-five mortality rate (8a) Prevalence of death rates associated with UNDER-FIVE MORTALITY RATE 20 INFANT MORTALITY RATE malaria – lack of data 18 MDG TARGET (UNDER-FIVE MORTALITY RATE - 2/3'S OF 1990 LEVELS BY 2015) MDG TARGET (2/3'S OF 1990 LEVEL BY 2015) (8b) Proportion of population in malaria risk areas 16 14 using effective malaria prevention and treatment 12 measures – lack of data 10 8 (8c) Prevalence and death rates associated with 6 tuberculosis 4 (8d) Proportion of TB cases detected and cured 2

Mortality Rates (deaths per 1000 live births) 0 under DOTS (Directly Observed Treatment Short 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Course)

Source: United Nations, Millennium Development Goals Indicators NOTE: 8(a), 8(b) and 8(d) excluded due to lack of data

Goal 5: Improve Maternal Health TARGET 8: Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases

PREVALENCE OF TUBERCULOSIS Target 6: Reduce by three-quarters, between 1990 9 1.2 PROPORTION OF TB CASES DETECTED AND CURED UNDER DOTS and 2015, the maternal mortality ratio 8 (Directly Observed Treatment Short Course) 1 INDICATORS: 7 6 0.8 5 (6a) Maternal mortality ratio (TARGET: reach only 70 0.6 deaths per 100,000 live births by 2015) 4 Percentage 3 0.4 (6b) Proportion of births attended by skilled health 2 0.2 personnel – no verifiable target 1 Prevalence Rate per 100,000 of the Population NOTE: 6(b) excluded due to lack of suitable target 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: United Nations, Millennium Development Goals Indicators

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 76 GOAL 7: Ensure Environmental Sustainability 77 TARGET 10: Halve, by 2015, the proportion of people Target 9: Integrate the principles of sustainable without sustainable access to safe drinking water - 10(a) development into country policies and programs PROPORTION OF POPULATION WITH SUSTAINABLE ACCESS TO AN IMPROVED WATER SOURCE

and reverse the loss of environmental resources MDG TARGET (Halve the % of people without sustainable access to water by 2015) (9a) Proportion of land area covered by forest – no verifiable target 100 (9b) Land area protected to maintain biological 95 diversity 90 (9c) GDP per unit of energy use (as proxy for energy 85 efficiency) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 (9d) Carbon dioxide emissions (per capita) Percentage of the Population with Sustainable Access to Drinking Water - both Rural and Urban

Target 10: Halve by 2015, the proportion of people Source: United Nations, Millennium Development Goals Indicators without sustainable access to safe drinking water (10a) Proportion of population with sustainable Target 11: By 2020, to have achieved a significant access to an improved water source improvement in the lives of at least 100 million slum dwellers TARGET 9: Integrate the principles of sustainable development into country policies (11a) Proportion of people with access to improved and programmes and reverse the loss of environmental resources - 9(a) and 9(b) sanitation

PROPORTION OF LAND AREA COVERED BY FOREST (11b) Proportion of people with access to secure tenure LAND AREA PROTECTED TO MAINTAIN BIOLOGICAL DIVERSITY

21.2 0.145 21 0.14 TARGET 11: By 2020, to have achieved a significant improvement in the lives 20.8 0.135 of at least 100 million slum dwellers - 11(a) and 11(b) of Land Area Protected Area

20.6 0.13 Ratio to Surface Area Slum Population as % of Urban (Secure Tenure Index) 20.4 0.125 Proportion of People with Access to Improved Sanitation Forested Land as a Percentage 0 1 2 3 4 5 6 7 8 9 0 1 2 3 100 199 199 199 199 199 199 199 199 199 199 200 200 200 200 90 80 70 Source: United Nations, Millennium Development Goals Indicators 60 50 40 30 TARGET 9: Integrate the principles of sustainable development 20 into country policies programmes and 10 reverse the loss of environmental and resources - 9(c) and 9(d) 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

GDP PER UNIT OF ENERGY USE CARBON DIOXIDE EMISSIONS (PER CAPITA) Source: United Nations, Millennium Development Goals Indicators

200 6 a 180 4

160 2 Energy Supply CO2 per capit Metric Tonnes of (Kg per $1000 ppp) 140 0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: United Nations, Millennium Development Goals Indicators

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development Annex 2. Chile’s Performance on Governance Indicators

76 10.1 Governance Performance in Recent Years of the bureaucracy, the competence of the civil 77 servants, independence of the civil service During the course of the 1990s the international from political pressures, and credibility of community has put increasing emphasis on the Government’s commitment to policies. the quality of ‘governance’ as an independent ‘Regulatory Quality’ focuses on the policies variable that explains cross-country differences themselves including the extent to which the in socio-economic outcomes. In the context government intervenes in the market (wage/ of the ‘resource curse’ hypothesis, a number price controls, trade barriers, import/export of quantitative studies have suggested that regulations). improved governance structures and institutions correlate with better development outcomes. ● The third dimension summarizes the respect of Researchers have made use of indicators on the citizens and the State for the institutions that quality of governance reported by a number of govern their economic and social interactions. survey institutes, think tanks, non-governmental ‘Rule of law’ measures the extent to which organizations and international organizations and agents have confidence in and abide by the compiled on the basis of perceptions gathered rules of the society. These include perceptions from a large number of enterprises, citizens and of the incidence of violent and non-violent expert survey respondents. This Annex reports crime, the predictability of the judiciary and on the quality of governance in Chile compared to the enforceability of contracts. Finally, ‘Control other Latin American countries, as measured by of Corruption’ measures the perception of the WB Governance Indicators and the UNU World corruption defined as the exercise of public power Governance Survey. These indicators would most for private gain. According to the framework, likely appear in the governance conditionality that the presence of corruption represents a lack of the Extractive Industries Review (EIR) proposed. respect for and legitimacy of formal institutions and thus governance failure. 10.2 The World Bank Governance Indicators These composite Governance Indicators measure Since the late 1990s, the World Bank has compiled in numerical values from –2.5 (worst) to +2.5 (best) six governance indicators, which combine several and are subject to margins of error, which are hundred individual variables measuring governance clearly indicated. It is stressed that the indicators perceptions (see http://web.worldbank.org). They are indicative and should not be used to infer draw on data from 25 separate sources compiled precise country rankings. by 18 different organizations. The six indicators measure three dimensions of governance (two for Figure 10.1 and Table 10.1 depict Chile’s values from 1996 to 2004. each):

Figure 10.1 Chile’s Governance Indicators from 1996 to 2004 ● The first dimension measures theprocess by which governments are selected, monitored and replaced. The indicator ‘Voice and Accountability’ 2.5

refers to the extent by which citizens of a 2 country are able to participate in the selection of Voice and Accountability governments and also measures various aspects 1.5 Political Stability Government of the political process, civil liberties and political 1 Effectiveness rights. ‘Political Stability and Absence of Violence’ Regulatory Quality measures perceptions of the likelihood that the 0.5 Rule of Law government in power will be destabilized or 0 overthrown by possibly unconstitutional and/or Control of Corruption violent means. -0.5 1996 1998 2000 2002 2004

● The second dimension measures the capacity Source: http://web.worldbank.org of the government to effectively formulate and implement sound policies. ‘Government Effectiveness’ summarizes perceptions of the quality of public service provision, the quality

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 78 Table 10.1 Chile’s Governance Indicators from 1996 to 2004 79 1996 1998 2000 2002 2004 Voice and Accountability 0.93 0.65 0.56 1.07 1.09 Political Stability 0.75 0.61 0.85 1.03 0.89 Government Effectiveness 1.2 1.41 1.34 1.26 1.27 Regulatory Quality 1.52 1.22 1.38 1.48 1.62 Rule of Law 1.26 1.27 1.31 1.24 1.16 Control of Corruption 1.28 1.2 1.56 1.53 1.44

Source: http://web.worldbank.org

The data shows that during the late 1990s there thereafter, over the eight-year period, this indicator was a slight deterioration regarding the two improved most strikingly, together with “Voice and indicators that relate to the process by which Accountability”. The only indicator that deteriorated governments are selected, monitored and replaced over the eight-year period is the “Rule of Law”. (“Voice and Accountability” and “Political Stability and Absence of Violence”). However, both indicators Figure 10.2 below indicates that Chile’s governance improved by 2002 and remained nearly unchanged structures deliver much better results than all in 2004. other countries in the Latin American region. This is particularly true with regard to the respect The two indicators measuring the capacity of of citizens and the State for the institutions that government to effectively formulate and implement govern their economic and social interactions. sound policies do not show much variation over the Chile’s lead is smallest for the process by which eight-year period. However, they appear to mirror governments are selected, monitored and replaced. each other: “Government Effectiveness” improves when “Regulatory Quality” deteriorates, and vice With the caveat that the statistical compilation of versa. the WB Governance Indicators does not support a precise ranking of countries, Table 10.2 shows the With regard to the respect of citizens and the State aggregate governance values for Latin American for the institutions that govern their economic and and Caribbean countries with Chile at the top. social interactions, one of the indicators - “Control of Corruption” - showed an improvement from 1998 to 2000, almost in parallel to that of “Political Figure 10.3 Chile and Peru compared, 1996 and 2004 Stability”. Whilst there is a slight deterioration 2

Figure 10.2 Chile compared to Latin American averages 1.5

1 CHILE (2004) Peru 1996 Peru 2004 0.5 Voice and Chile 1996 0 Accountability Political Chile 2004 -0.5 Stability -1 Government Effectiveness -1.5 w Regulatory d s y Quality n Voice an Quality Rule of La Control of Accountability Government Regulator Rule of Law Political Stability Effectivenes Corruptio

Control of Source: http://web.worldbank.org Corruption

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)

78 Table 10.2 Chile compared to other Latin American 79 Country Population Voice and Political Government Regulatory Rule of Control of Governance (million)/1 Accountability Stability Effectiveness Quality Law Corruption 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 1.3 0.49 0.04 0.47 0.61 0.17 0.02 Tobago 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 8.7 0.27 -0.01 -0.46 -0.28 -0.54 -0.50 -1.52 Republic 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 Bolivia 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 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 Haiti 8.4 -1.50 -1.87 -1.90 -1.11 -1.66 -1.49 -9.53

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. 10.3 UNU World Governance Survey In 1996, Chile outperformed Peru most clearly with regard to the process by which governments As an alternative approach, the UNU World are selected, monitored and replaced (‘Voice and Governance Survey proposes a political process Accountability’, ‘Political Stability and Absence of approach to measure operational rules in use. Violence’). By 2004 Peru caught up in this area. The survey currently covers 16 countries, including But Chile’s lead in the respect of citizens and the the three Latin American countries: Chile; Peru; State for the institutions that govern their economic and Argentina. The underlying UNU definition of and social interactions (‘Rule of law’, ‘Control of governance focuses on the formal and informal Corruption’) has become even more pronounced. rules of the political game. These constitute the The discrepancy between the two countries has framework within which political processes take also increased with regard to the capacity of the shape. Table 10.3 shows how the UNU methodology Government to effectively formulate and implement divides the political process into six institutional sound policies (‘Government Effectiveness’, ‘arenas’. ‘Regulatory Quality’).

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 80 10.3 Functional dimensions of Governance and their institutional arenas 81 Process Institutional Arena Purpose of Rules Dimension 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 10.4 . Respondents rate the specific issue using a social units (i.e. families, communities) to 5-point response scale: very high, high, moderate, the State. It is where values are formed and low, or very low. The index ranges from a minimum expressed and where interests are articulated. of 5 to a maximum of 25 points for each of the 6 ● Political Society defines the area where citizens governance areas. are represented and their views are aggregated into specific policy demands and proposals. The Table 10.5 shows the results for Chile (highlighted) key components of political society are parties, and Peru and Argentina. electoral systems, national, sub-national or local authorities and the Legislature. The legitimacy of Chile leads the three Latin American countries in the political society depends to a great extent on all six governance arenas. It has also improved the credibility of individual legislators. its performance in all aspects from 1996 to 2000. ● Government in terms of the Executive is The most noticeable improvements appear to have responsible for taking policy decisions and for been taken place with regard to the Judiciary, establishing a political climate that ensures peace the Government and Civil Society. In particular, and security. This includes the relationship with there has been a reduction of discrimination in the military, the prevention of extreme poverty politics (DIPO) and greater subordination of the and efficient management of the civil service. military to the civilian government (MISU). In ● Bureaucracy is the administrative machinery 1996 respondents were least confident about the that implements policies. It participates in Judiciary, whilst in 2000 it is the Bureaucracy that formulating policies, implementing these and is most lagging behind. Interestingly, respondents delivery of public goods and services. Important feel most confident about Economic Society where aspects in this arena include the recruitment of Chile’s lead position has been unrivalled, both in civil servants, their accountability and decision- making processes within the bureaucracy. 1996 and in 2000. ● Economic Society describes the state-market relations. This includes the norms and Comparison with Peru shows that absolute institutions that regulate how enterprises and the improvements in Peru have been much greater. self-employed operate, how property is owned Peru has particularly caught up with regard to and protected, how capital transactions take Political Society and with Bureaucracy. In the latter, place and how trade is conducted. Chile appears to have been most stagnant. In 1996 ● The Judiciary covers conflict and dispute Chile had superseded Peru most noticeably in the resolution within the private sector and between extent to which there was competition for political private and public entities. This arena includes power (COPP), in government’s commitment to the rule of law but also affects informal peaceful resolution of internal conflicts (PRIC) and mechanisms of conflict resolution. in the legislature’s impact on policy content (LEFU). However, in 2000 the discrepancies are greatest The World Governance Survey is based on with regard to citizens’ respect for the system of questionnaires completed by a wide spectrum of rule-making (CIRE), clarity in judicial decision- country representatives. It poses five questions making processes (DMJS) and public officers’ in each of the six arenas, as summarized in Table promotion of property rights (PRPR).

80 Table 10.4 Governance arenas, data codes and questions 81 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 LREP: To what extent is the legislature representative of society? 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 PRPR: To what extent do persons in public office promote respect for property rights? Society 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)

Table 10.5 The World Governance Survey for Chile, compared with Peru and Argentina

Civil Society Political Society Government FREX5 FPAA5 DIPO5 GFPD5 CIRE5 sum LREP5 COPP5 PUPR5 LEFU5 LEAP5 sum PSEC5 STOL5 NATI5 MISU5 PRIC5 sum Argentina 3.89 4.43 3.00 1.77 2.46 15.5 2.14 3.46 2.21 2.36 2.20 12.4 2.60 2.51 2.41 4.17 3.77 15.5 Chile 3.37 4.10 2.57 2.53 3.77 16.3 2.70 3.63 2.77 3.30 2.30 14.7 3.43 3.33 2.70 2.43 3.93 15.8 1 99 6 Peru 2.05 2.89 3.16 1.65 1.77 11.5 1.92 1.92 2.24 1.76 1.46 9.3 2.22 2.54 2.57 1.59 2.35 11.3 Bureaucracy Economic Society Judiciary HICS5 MEBA5 ACCO5 DEPR5 EAPS5 sum PRPR5 REFI5 COTR5 CPPP5 GLTR5 sum JUCI5 DMJS5 JUOA5 ILHR5 NJPC5 sum Argentina 2.83 1.63 2.03 1.80 2.57 10.9 2.74 2.17 1.83 3.13 3.56 13.4 2.43 2.01 1.99 3.51 2.77 12.7 Chile 3.03 2.43 2.63 2.87 3.20 14.2 3.83 3.77 3.77 3.25 3.98 18.6 2.50 2.50 2.63 3.13 2.43 13.2 1 99 6 Peru 2.76 2.14 1.84 1.68 2.57 11.0 2.84 2.59 2.62 1.97 3.11 13.1 1.46 1.43 1.49 1.70 2.16 8.2 Civil Society Political Society Government FREX FPAA DIPO GFPD CIRE sum LREP COPP PUPR LEFU LEAP sum PSEC STOL NATI MISU PRIC sum Argentina 3.97 4.49 2.77 1.86 2.43 15.5 2.17 3.51 2.33 2.77 2.20 13.0 2.69 2.66 2.40 4.23 3.89 15.9 Chile 3.70 4.27 3.43 2.87 3.60 17.9 2.73 3.93 2.83 3.40 2.40 15.3 3.70 3.63 2.87 3.20 4.20 17.6 2000 Peru 3.43 4.05 3.19 2.81 1.97 15.5 2.27 3.46 2.84 3.27 2.00 13.8 3.03 2.64 2.51 2.97 3.38 14.5 Bureaucracy Economic Society Judiciary HICS MEBA ACCO DEPR EAPS sum PRPR REFI COTR CPPP GLTR sum JUCI DMJS JUOA ILHR NJPC sum Argentina 2.94 1.70 2.11 1.86 2.77 11.4 2.74 2.36 1.91 3.16 3.54 13.7 2.43 2.16 2.21 3.80 2.91 13.5 Chile 3.00 2.47 2.83 2.93 3.37 14.6 3.87 3.83 3.80 3.50 4.18 19.2 2.67 3.00 3.03 3.70 2.67 15.1

2000 Peru 3.00 2.16 2.54 2.14 2.65 12.5 2.70 2.78 2.88 2.41 3.16 13.9 1.92 1.78 2.05 3.68 2.68 12.1

Source: Court, J. et al (2004) Note: The maximum score on the sums in the Table is 25.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 82 It is striking that in all three Latin American undermining the economic and administrative 83 countries the Bureaucracy and the Judiciary remain basis on which the former regime had rested. the weakest aspects of governance. There is only This has helped Chile to avoid falling back into a one specific area where Peru is slightly better off vicious cycle of opposing interest groups fighting than Chile, namely in non-judicial processes for over particularistic stakes within the context of conflict resolution. the democratic process, leading to collectively undesirable outcomes. It would appear that this 10.4 Conclusions is what distinguishes Chile’s economic and social success. If this logic holds true, the key question Chile unambiguously leads the region in terms of is what governance structures and processes have standard measures for the quality of governance. allowed Chile to follow this path and to overcome It would appear that the country has been better the collective action problems that other countries governed than any of the other Latin American typically face. And, in the context of this initiative on countries. However, data on governance indicators mining, the next question is how this has impinged has only been collected for a short period of time on the transmission links between the presence – barely eight years. Thus the indicators can only of and revenue mining activities and the social and suggest that Chile has been well governed since the economic benefits that citizens have gained. second half of the 1990s. Indicators do not explicate how Chile managed to achieve this performance in In summary, governance indicators tell us the first place. little about the socio-political processes that have allowed Chile this head start (for example Taking into account Chile’s contemporary political compared to its neighbor Peru), but the cross- history summarized in Annex 3, it is plausible to country comparison helps to raise the important assume the following: 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

82 11.1 Introduction centralization of political power and the 83 prevention of secularization. Chile’s political history looks back to a democratic ● The Liberal Party was backed by mine owners, tradition of nearly two centuries. This tradition was business people and a few landowners. Apart interrupted only twice: first, there was a short spell from the issue of secularization, its political and of authoritarian rule in the 1920s and second, the economic views did not differ much from those of military Government of General Pinochet, which the Conservative Party. lasted about 16 years from 1973 to 1989. Over ● The National Party represented high level this period the country had been governed by 3 bureaucrats as well as banks, trade and industry different constitutions. The first Constitution lasted and formed alliances with both liberal and until 1925 and set out a parliamentary system with conservative forces. limited suffrage. The second Constitution in place since 1925 was replaced in 1980 by the military High revenue obtained from taxing the export of Government. The third Constitution of 1989 was raw material allowed the State early on to invest in built on a partial reform of the 1980 Constitution physical and social infrastructure and to become and prepared for the transition to democracy. relatively autonomous and insulated from oligarch interests. This relative independence, coupled This Annex 3 provides a brief overview of Chile’s with a limited role of the military, allowed for the political history. It explains that Chile’s economic enhancement of the political sphere and peaceful success since the restoration of a civic government conflict resolutions. has been traced less to the particular institutional features of its presidential system of government After a short period of military rule (1924-1925) then to the consensus-building incentives inherent a new Constitution came into force in 1925, to the policy process. The literature suggests that establishing a strong presidential system of it is this constellation that has encouraged that government typical for Latin America. Important legislative decisions enjoy majority support and that changes in the social structure took place in public policies can be implemented effectively. the early years of the 20th century. Against the background of industrialization and the mining 11.2 From Independence Until the 1930s66 industry in the north of the country, an industrial proletariat began to form which organized unions Chile first attempted to gain independence from and new political parties. In the larger cities, Spanish colonial rule in 1810. But it required the middle class also began to grow, comprising combined forces with Argentina to finally drive state employees, traders, intellectuals and small out the Spanish army and declare independence businessmen. These groups began to pressure for in 1818. By the end of the nineteenth century the political reform and demand economic and political Chilean National Congress was considered one integration. of the strongest legislative bodies in the world. Mirroring developments in Europe and the United 11.3 From the 1930s to the Early 1970s States, politics in Chile during the 19th century was characterized by conflict between supporters of a The world economic crises of the 1930s hit the parliamentary model and the defenders of a strong Chilean export industry very badly, causing presidential regime. The parliamentary model unemployment and a decline in foreign capital. dominated until 1920. This introduced a fourth party and a turning point into Chilean politics. A new party of the middle Three parties represented the land-holding class emerged, the Radical Party, integrating two oligarchy and the newly emerging urban classes. previous Marxist movements. Until the early 1950s, These three parties fought for their interests in this additional party was a stabilizing factor within Parliament. They included: the Chilean political system, because it joined coalitions with both left and right-wing groupings ● The Conservative Party, whose social basis to back its three consecutive presidencies. Chile’s included large estate owners, banks and presidential political system was dependent on the Catholic clergy. Its objective was the compromise because no political party could gain

66 This chapter lends substantially from a review of Chile’s political history the presidency on its own. by Jaime Sperberg in Berg-Schlosser and Kersting (2003), Poverty and Democracy, Zen books.

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 84 During the period from 1930 to 1970, wider groups The Chilean president, rather than the National 85 of the population were enfranchised. Electoral Congress, became the most important legislator. reforms at the end of the 1950s, and the beginning Already, since 1925, had the Chile’s presidential of the 1960s, cut back the control which large- system be viewed as one of the strongest estate owners had exercised over the votes of presidential systems in the world. Nevertheless agricultural workers and also limited the possibility the National Congress had stood out as a body of vote buying. The integration of different social with significant powers and influence and as a groups into political life enabled middle class deliberative body and institutions for conflict parties to extend political influence to industrial resolution and political negotiation67. workers and the lower strata of society. The 1980s Constitution provided the president Further institutional and policy changes also took exclusive initiatives in all matters relating taxation, place in the aftermath of the world economic the creation of public agencies and employment crises. Chile changed its economic model from one related to these, the creation and changes to that exported raw material (particularly saltpeter entitlements, social security and collective and copper) to one that was more domestically bargaining procedures. The presidential national oriented. In this context, the State became the most budget would automatically be adopted if the important economic and political actor. In 1939 a Congress did not rubber stamp it. Presidential state development agency was founded which was rights also included urgency and extraordinary aimed at building a domestic industry and to create provisions. new job opportunities. State interventionism and an increasingly expanding state sector remained In 1988 the military Government called for a a central feature of Chile’s economic policy until plebiscite on the continuation of its leadership. This 1973. It culminated in the nationalization of the it lost. This marked the beginning of the transition copper mines and other industries following to democracy. the election of left-wing party leader Salvador Allende in 1970. It is said that although the Allende 11.5 Democracy since 1990 Government proposed this move, it was widely supported by different parties in the Congress. Free and universal elections were called in 1990 and brought in as elected president the Christian 11.4 The Military Regime from 1973 to 1989 Democrat (CD), Patricio Aylwin. Aylwin governed on the basis of the Coalition of Parties for Democracy Allende’s policy decisions triggered a strong (CPD). Eduardo Frei, another Christian Democrat reaction from the right. Allende was deposed who had already been president from 1964-1969, and assassinated in a military coup in September succeeded Aylwin from 1994 to 2000. In 2000 1973. General Augusto Pinochet led a military Ricardo Lagos, a member of the Socialist Party (PS) dictatorship for the next 16 years. Under the became president. He has since lead the Coalition military regime a neo-liberal economic program together with the Party for Democracy (PPD). was introduced reversing and reducing the State’s role in the economy, liberalizing markets, The transition to democracy was based on an deregulating working relationships and transferring agreement between the old authoritarian powers market principles to the social sphere. This and the new democratic government to refrain restructuring did not work without the military’s from prosecuting military officers for human rights use of violence, particularly against the urban violations and also to preserve certain privileges poor. The economic situation improved from for the military. This included the continuing 1985 onwards and this is said to have caused the position of Pinochet as supreme commander of the middle class to turn its back on protests against military and the appointment of a certain number deteriorating social conditions. of senators. The military still holds a dominant position in the National Security Council (Conase), Following 17 years of authoritarian rule, the and it holds a right of veto on questions concerning military regime replaced the 1925 Constitution in human rights and institutional reform. These 1980 and introduced a new Constitution, which and other prerogatives have limited the scope of further strengthened the presidential system maneuver for the democratic governments. and undermined legislative checks and balances. 67 Morgenstern and Nacif (2002)

84 The 1989 constitutional revision, which prepared 85 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 second-place list68.

Well-organized business associations lobbied the new democratic government to stay on the liberal- economic 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 Annex 4. Government comments

86 87

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 86 GENERAL COMMENTS OF THE CHILEAN COPPER COMMISSION 87 ICMM RESOURCE ENDOWMENT PROJECT – PHASE II: CHILE CASE STUDY (Draft Main Report – October 2005) We kindly acknowledge receipt of your request to out that the implementation of a hybrid formula for the Minister of Mining of Chile and to the Chilean management of mining wealth is more efficient and Copper Commission (Cochilco) for review of the at the same time it favors the autonomy of mining case study of our country, included as comparator operations at a local level. country case of the ICMM Resource Endowment Project. Consequently, please find attached our Resource Curse: general and specific comments. The study contains comments on economic We feel very honored that the case of Chile has indicators70, whether they reflect or not the been taken as case of reference and also that consequences of the ‘resource curse’. The case of the ICMM project underlines the importance of Chile defies the negative consequences of this line the positive experience of our country’s mining of reasoning which are not going to be fulfilled sine resources, the contribution of our mining wealth in qua non for the development of Chile’s extractive promoting our economic development, and at the industry and in many other countries. Although, same time in decreasing poverty and improving the study includes several comments that could efficiency of our production costs and productivity in be misunderstood as they were supporting such the mining industry. concept.

Taking into consideration the worldwide discussion The reasoning of ‘resource curse’ means that the about the sustainability of the mining industry at the mining industry does not necessarily contributes public financial organizations in the last years, we to the economic development of countries with consider as most relevant that the project is being significant or rich mineral resources, taking as completed with some conclusions that emerge evidence poverty associated to backward mining from the economic and social experience of Chile regions in developing countries. Finally, this theory which our Government has debated in different aims to demonstrate a correlation between the international fora. Consequently, we would like to dependency on mining exports and slow growth of highlight hereby two conclusions of the study: the national economy and greater poverty.

● The great importance of economic growth from Other studies have responded this point of view, mining in terms of sustainability for improvement considering some positive economic experiences of of social conditions and poverty reduction69. countries with a substantial endowment of natural ● Concerning to the redistribution of mining resources. These studies demonstrate that exports revenues, fiscal policies are a key factor to of goods produced with an intensity of capital, encourage economic growth, employment, and machinery and chemical products, have stimulated a fair distribution of wealth. According to each the endowment of other resources and encouraging fiscal policy, management of revenues could a technological skills and knowledge of those have a centralized or decentralized allocation by activities, together with an open trade regime, a government, and any of both alternatives could thereby diversifying exports and increasing trade be efficiently applied or recommended for the with different economic sectors 71 72. management of public resources. 70 References of the study that validate this approach are included in:

● Figure 3.2 shows that throughout the 1960’s Chile’s exports were Which formula has to be applied to redistribute dominated by minerals. The economy did suffer from real exchange mining revenues? This will depend on the different rate appreciation in a classic attack of ‘resource curse’ (page 11). ● With the exception of the currency appreciation and subsequent crisis countries’ development level, their political, legal, in the early 1980s, there appears to have been no long-lasting signs of and economic structures, their fiscal management ‘resource curse’ since the overthrow of Allende and the introduction of neo-liberal economic policies (page 15) (Executive Summary).

policies, governance of local communities ● Furthermore, as the importance of mining in merchandise exports versus those of the rest of the country, and the has fallen, the risk of an attack of “resource curse” correspondingly recedes” (page 15) centralized capacities to manage mining wealth. 71 The World Bank, From Natural Resources to the Knowledge Economy: The experience of some countries seems to point Trade and Job Quality, David de Ferranti….[et al.], 2001. 72 The Work Bank and the Central Bank of Chile, Conference on Natural 69 Page 43, point 4. Resources and Growth, Chile, January 2002

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development 88 Summarily, conclusions must be clear pointing The following competitive factors have enormous out mining resources as a potential asset for significance in the Chilean mining development: development, instead of turning back to the ‘resource ● Favorable mining geology. curse’, whose implications are debatable in other ● Mining prospective – Important demonstrated countries such as Chile, Australia, and Finland. reserves at a worldwide level. According to the USGS, Chile owns 38% of copper based reserves74. In this sense, we recommend to quote paragraph ● Mining exploration capacity. 46 of the Report of the Johannesburg Summit ● Mining exports growth capacity. (September 2002), where an improved contribution ● Seaports infrastructure development. of the mining activity is mentioned as a challenge for reducing poverty in countries with rich For example, it is worth noting that Chilean copper mineral resources. Also, herein mining extractive output and other minerals (molybdenum, non- industries are seen to enhance their environmental metallic mining) since the early 90’s, as briefly performance and labor safety, their involvement commented in text75, cannot be only studied as a with local communities, and consultation with foreign investment issue, but also as a competitive stakeholders. capacity of the national mining industry (i.e.: competitive production costs, follow-up and The Government of Chile supports the World leadership in the international market, governance Summit reminder, but not the ‘resources curse’ capacity, adjustment to new technologies and better analysis. practices, environmental and social certification).

Success factors in the mining/economic sectors ● Human Capital Development (it is suggested to be relationship in Chile developed as 5.6.3.):

The reasons behind ‘success factors’ are examined References and comments can be found in other in Chapter 5, which favor better synergies between parts of the text76. However, it is not developed the Chilean mining sector and entrepreneurial as a ‘success factor’ of the relationship between activities in other economic sectors. Even though the mining sector and other economic sectors some other factors appear to be undertaken in entrepreneurial activities. the rest of the document, these were not properly individualized as ‘success factors’, and we suggest With respect to “La Escondida” mining company, to be developed in Chapter 5. the study should investigate thoroughly what percentage of human capital other mining The above is related to the long-term strategy for companies use, as well as its individual impact Chilean development –based on an open economy as consumer of goods and regional services. to competence and receive private investment, The above could be further developed, as the trade liberalization, modernization of the financial study seems to argue that Region II shows better system, modernization of the State, advanced economic indicators than the rest of the country technologies for extraction and processing of due to the contribution of that mining company. mineral resources, and other factors- besides some economic and social policies, based on its 74 Mineral Commodity Summaries, January 2006 competitive factors. 75 See as example: ● Chilean copper production has been growing rapidly since the early 1990s, with mine production increasing from 1.6 million tons ● Competitive factors (suggestion to be developed 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, as point 5.1): paragraph 3)

● Foreign investment has led to a rapidly growing sector since the early A short reference on this respect was made under 1990s with mine production increasing more than threefold over the period from 1990 to 2004” (page 16, paragraph 2). bullet point 5.273 as advantages for the foreign investor, 76 See as example: but it was not clearly developed as “success factor”. ● Through the 1980’s and 1990’s Chile benefited from an increasingly educated and skilled labor force. This tradition has continued in 73 See as example: recent year and since 1990 government expenditure on education has

● Chile certainly has other advantages to offer foreign mining investors, doubled, reversing the drastic cut in education spending undertaken by most important of which a very favorable geology, but also good the military government” (page 14, paragraph 1). infrastructure with short distances to ports, a favorable climate with ● It is probable that the existence of the Fund has made it easier for the extremely low rainfall in the main mineralized zones (which simplifies government to invest in long range educational and other programs to environmental management), and stability leading to low country risk” improve human capital” (page 14, paragraph 3). (page 50).

The Challenge of Mineral Wealth: using resource endowments to foster sustainable development