Scott Sumner  

Did the copper SOE help Chile develop?

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Tyler Cowen says yes:

One reason the Chilean reforms went well was that the state had nationalized the copper mines. That provided a steady flow of money, thus minimizing the need for revenue-raising distorting policies elsewhere. More generally the revenues helped build a stable state backed by a secure coalition, which in turn liberalized much of the rest of the economy. For all the talk about laissez-faire and the Chicago boys, the Chilean privatizers never gave up their hold on those mines. And the mines proved easy enough to run and convert into revenue...and they are still a lucrative source of foreign exchange.
I don't find that claim to be all that convincing. Wouldn't it be better to privatize the mines, and tax the output? Here's The Economist on Chilean copper mining:
The copper mines themselves are far from the capital. Escondida, the world's biggest (and the source of over 5% of global supplies) is a 1,300km (800-mile) trek north, in the middle of the Atacama desert. BHP Billiton, the world's biggest mining company, operates two gigantic pits there. The deeper one is 3.9km from side to side and 650 metres from brim to bottom. Trucks as big as houses, working non-stop, haul 1.5m tonnes of rock out of Escondida each day. Managers may drive 150km in a shift. Last year the mine disgorged 1m tonnes of metal. Overall, Chile produces a third of the world's copper.

BHP has 4,000 workers on site, plus another 13,000 contractors nearby.

So the world's largest copper mine is in Chile, but run by a private company.

Chile's copper industry is a hybrid. Codelco, the state mining firm, competes with private ones. In the past Codelco has suffered from a lack of investment, but that is improving. A change in corporate governance in 2010 is slowly making it more like a private firm, by freeing the board from political control.

In 2000-05 the government's income from mining averaged $2.1 billion a year. As Chinese growth accelerated, that rose to $11.5 billion a year between 2005 and 2011. But the boom owed almost everything to the copper price. Chile's output of the red metal has hardly grown in a decade.

Copper is certainly an important part of the Chilean economy, but the state owned Codelco produces only about 1/3 of Chile's copper, a ratio that's been stable since 2000. And the firm has apparently been a bit less dynamic that its private competitors, until recent reforms made it operate more like a private firm.

Looking at this picture, I find it hard to believe that Chile's neoliberal reforms would have been all that different if the copper industry was 100% private, and its exports were taxed to provide revenue for the government.

Tyler then goes on to discuss the role of SOEs in Chinese development. These have gradually been made more business-like, especially in the late 1990s when there were massive layoffs to boost productivity. But I think the bigger story in China (and elsewhere in East Asia) is the government ownership of land, which provides an important share of government revenue. The Singapore government, for instance, has a monopoly on the right to "mine" (i.e. create) new land. As a result, Singapore's land area has grown rapidly, and this has generated a lot of revenue. Local governments in China rely on land sales to pay for infrastructure projects.

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COMMENTS (9 to date)
ThomasH writes:

You may be underestimating the difficulty of privatizing and taxing the rents of a major public investment. The attempts in several places have not been great. Not attempting that off the bat was probably a better strategy allowing the reformers to concentrate on higher priorities.

_nl writes:

Seems like Tyler's argument is at odds with the rentier state thesis, yes?

JJ writes:

Question for Libertarians:

Would a SOE be compatible in a Minarchist Libertarian society? I see SOE as a preferable option over taxing citizens to pay for the Military. Assuming the government allows competition, I would rather have the government use the profits from their business operation to fund government than taxing citizens. In this scenario, you still have a voluntary society that requires no coercion by the government.

david writes:

No - consider the political incentives of management on the ground, in sponsoring revolution or otherwise. Managers can stage lockouts or incite confrontations with miners in order to freeze the supply of hard currency from exports.

Political control permits the assessment and enforcement of the loyalties of individual managers, which privatization plus mining licenses does not. Underinvestment is a deliberate strategy here (limiting the availability of funds limits the discretion of managers).

Scott Sumner writes:

Thomas, I was under the impression that Chile successfully taxes the private copper exporters. Is that not true?

JJ, If they allow competition then economic profits fall to zero.

David, Is that in reply to JJ or me?

Brett writes:

The SOEs in China may have acted as a "corruption soak" keeping potentially destructive levels of corruption away from the private sector for most of its development. You buy off officialdom with posts in the SOEs and state bureaucracy, and then let the private sector do its thing with periodic state support.

Ak Mike writes:

I'm familiar with the situation in Alaska, where private oil producers have been given access to resources on public lands, and then have been taxed to produce an enormous sovereign wealth fund in addition to funding government operations. In my judgment the private producers have far outperformed any possible governmental producer, for a variety of reasons including greater expertise and access to capital, resulting in much more money for the government.

In short I agree with Scott.

anon from cl writes:

JJ, I assume that when you said "I see SOE as a preferable option over taxing citizens to pay for the Military", you were talking about this:

The wikipedia article is a pretty good introduction to the law and should help you understand how that lack of investment mentioned in The Economist's article came to be.

JJ writes:

anon from cl,

I wasn't referring to that. I never heard of that case. I was just referring to SOE in general. Use them to fund government operations instead of using taxes. SOE won't distort the marketplace like taxes do.

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