On Sunday, October 9, top mining executives and representatives acknowledged in the press (Mercurio, Economia y Negocios) that the boom of copper was just over. To see record-high prices and a boost in demand like the one Chile experienced with China’s relentless appetite for growth is history; those old copper days are hard to come back, at least in the foreseeable future. Key executives and CEO's from Chile-based mining companies discussed the challenges ahead for the industry. They analyzed the way forward from expanding mining projects further south in the central areas of the country- to hiring social science experts able to negotiate with the communities owing to new legislation that could impede the overexploitation of glaciers and safeguard the ecosystem in the face of extractive activities. Country Risk Chile analyzes these opinions expressed in the newspaper on October 9th and attempts to shed some light on the political risk and the opportunity involved when the copper rush is over, and the need for alternative strategies emerges.
On rainy days, Chilean authorities take recourse to what they know best: rely on the country’s fiscal rule, i.e., countercyclical fiscal policy, to help "mitigate the effects of external shocks." This fiscal rule translates into a panel of experts who estimate "cyclically adjusted government revenues based on factors such as the potential GDP growth and the medium-term price of copper" (Meyer, 2014). The budget is set to achieve a fiscal surplus of 0.5% of GDP over the medium term. Therefore, when revenues exceed the budgetary target, this surplus is saved and invested in sovereign wealth funds that can be used on rainy days.
And those rainy days are here with the end of the boom of commodities, the social change after a 25-year-political cycle, and new actors shaping the state’s preferences in the 2014 new electoral cyclem all of which have involved a hot debate on issues of equality gaps, education policies, and redistributive policies in the wake of a super copper cycle but growing disparities (OECD, 2013, 2014, 2015)
Chile does not live in autarchy, and its open economy makes it vulnerable to external shocks.
Early this year, we heard new Finance Minister Rodrigo Valdes talk about the need for fiscal austerity. Following the trend observed by our neighboring countries, Chile announced that the money on social expenditure would have to be reduced by roughly USD 500,000 and resorted to new mechanisms to boost productivity. Since the announcement from Bachelet’s Nueva Mayorìa center-left coalition to implement a set of second-generation reforms to tackle disparities and put an end to profit in education in answer to the widespread outcry by students marching on the street nationwide in a series of strikes and protests (2006, 2011), we have since witnessed ideological views on how to proceed with reforms transforming this process into a complex, draining and controversial transition to consolidate our democracy. Moreover, the external shocks in the economy and the reluctance of private investors to boost FDI in Chile until reforms are completed seem all to plot against efforts on distributive policies and monetary relief to families who wish to see their children attain university degrees without the burden of bank loans. Chileans have had a short-lived utopic dream of "free" education, which is considered a human right in opposition to education being viewed as a commodity. Consequently, we still need to verify if citizens’ dissatisfaction will surface on the streets again, affecting governance.
So why link the above with comments expressed by senior officials from mining companies - such as Codelco and transnationals - with ongoing reforms to tackle disparities? Indeed, the "inertia" from extractive economies is hard to die. It impedes proactivity; it stimulates reactivity. Moving companies further south while green movements and social movements opposed to damage to the eco-system must be reckoned with as a path of dependency that could quickly become a curse for Chile. A curse, by all means, when productivity levels and educational variables are being ranked as significant inconveniences to jump into full development, according to WEF Country Report 2014, 2015. However, all this could be the greatest blessing for Chile because, if and only if the wake-up call is pressed sufficiently complex and heard sufficiently loud, we could inaugurate a much-needed synergy between the productive & private sectors, the state, and universities to start adding value to the chain of productivity, boost competitiveness and seriously improve educational variables.
The fiscal rule, the budgetary austerity showed by the Nueva Mayoría’s left-center government coalition, amidst social change and new actors pressing the state with their demands to provide efficient public policies cannot counterbalance (as it did before) the limitations of extractive economies if we do not have a robust value-added chain. Moreover, this dependency path on extractive economies cannot possibly survive the global challenges of today’s geopolitics: if, in the past, we could afford the luxury of withstanding the shocks with counter-cyclical measures and keep on relying on raw material exports, all things being equal, that luxury today is no longer here with us.
We need to do more to add value to the chain. We need all stakeholders to envisage proactivity and additional ways to increase productivity.
What is next, then? Innovation. It takes time, and it takes funding. It takes the recognition of new strategies. The opportunity lies here with us. We have reached such a level of development that we can import cutting-edge technology experts and hire graduates from Becas Chile Funding who have left the country to study abroad. For that, the market must include and create new posts; the local entrepreneurs must incorporate new jobs to add those scientists into the mainstream and the local workforce. Changing the local market from a hierarchical, low-paid one with low productivity to a market driven by innovative ideas is necessary. Therefore, having a long-term strategy is vital. Aiming at that goal requires the participation of all Chilean stakeholders, converging on a new path, the innovative one, just as they did at the beginning of the 1990s, at the start of democratic times, when both elites, economic and politically aligned around growth, and the population adhered. It was feasible then. And today, it is highly desirable.
We must do it. The clock is ticking.
October 26, 2016
