ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Education and Science»
  • Economics

Has Chile seen the mining industrial sector become a niche to create linkages and boost economic development? - Part I

Updated on February 29, 2016

The article is divided in three parts. Part I provides an introduction to the Chilean economic and political recent history, while providing a summary on core issues discussed in this article such as the role of natural resource in economic growth, developments mechanisms and the creation of linkages. Part II provides an in-depth analysis of the structure, size and characterization of the Chilean mining industry and suppliers; following an analysis on the existent linkages across the copper mining sector. Part III follows with a critical analysis on the opportunities to increase the size of the production linkages towards high-value mining suppliers while comparing to the case of Australia and exploring economic network theory.


A brief review on Chile’s economic performance

Chilean political and economic evolution saw some major transformations in the second half of the 20th century. On the political side, the 1973’s coup d’État resulted in a 17-year long dictatorial military government. Chile can be seen as a neoliberal experiment, where almost all its economic principles were put in practice during this period of time, with a large influence of the University of Chicago (Kellogg, 2007). Prior to the 1980s, Chile’s economic performance was not particularly impressive, averaging 2.4% GDP annual growth. This outcome is largely attributed to the small size of the local economy and the historical dependency on commodities exports. These two constraints are identified as the main causes behind the cyclical economic evolution, which was very sensitive to any internal and international shocks (De Gregorio, 2004). Greater Chilean economic expansion came in the 1985-1997 period. During these “golden years”, the average GDP annual growth reached an impressive 7.6% (Bergoeing, 2014). The return of democracy resulted in political and social stability (De Gregorio, 2004), ultimately positioning Chile as the 54th economy in the world by 2014, with an income per capita of US$ 19,067 (Bergoeing, 2014) while becoming a member of the OECD in 2010.

Despite the successful growth rate achieved during this period, it became evident that it did not provide the basis for the development of high technological and productive sectors, which can be accounted in an almost inexistent variation of the total factor productivity (TFP) especially in the 1998 – 2010 period (OECD, 2013). This wide gap in terms of technological capabilities may become a serious restriction for a sustainable development (Alvarez & Labra, 2015). Furthermore, even when the living quality standards have improved significantly in the last decades, since the end of the “golden years” period up to 2013 the average annual GDP per capita growth has stagnated to 2.8% (Bergoeing, 2014).

Total Chilean copper mine production and its share in total exports for the period 1960-2012
Total Chilean copper mine production and its share in total exports for the period 1960-2012 | Source

Chile has been historically a mining country, and particularly in the last decades the copper mining sector have played a key role in the economy. As shown in the figure above, the share of copper exports has kept levels over 35%, and in the last decade reached an average 50% of the total exports while achieving the highest level of production. Recent estimations show that Chilean copper production and reserves represent 31% and 30% of the worldwide shares respectively (Consejo Minero, 2014). In a local level, the state-owned CODELCO is the largest copper producer with an average 30% participation in the last 15 years. This fact is quite interesting, as despite the liberalization wave that the country faced during the 1980s, CODELCO remained state-owned. This however has not been a barrier for multinational companies (MNC) to invest for the exploitation of Chilean assets. In this sense, the second most important actor is the Australian multinational BHP Billiton. Other large multinational mining firms such as Anglo American, Barrick and Glencore-Xstrata also have investments in Chile (Consejo Minero, 2014). The largest local private-owned mining company, Antofagasta Minerals, has increased it share of participation up to 13.5% in 2012. This combination of state-owned and private firms (national and international) offers interesting opportunities for the creation of linkages and development of different capabilities around the industry.

Natural resources and growth

One of the paradigms in the international development literature is the relationship between the abundance of natural resources and economic growth. Natural resources have historically been fundamental to the world’s economy and will continue to be so in the future. Estimations by the McKinsey Global Institute indicate that up to US$17 trillion of cumulative investment in oil, gas, and mineral resources will be needed by 2030 in order to keep pace with the increasing demand. One commonly shared view in the literature is the so called “natural resource curse”. Indeed, 69% of people in extreme poverty live in countries whose economies largely depend in their resources industry (Dobbs et al., 2013).

The fact that countries like Norway, Sweden, Finland, Canada, New Zealand, Australia and the United States have reached their economic growth through a large participation of the natural resource sector in their economy (Smith, 2007) cannot be ignored. More recently in the Latin-American region, Peru and Chile have shown consistent growth rates while avoiding some “curse symptoms” (Orihuela, 2013). A narrowed view that dooms countries for their abundance of natural resources seems to be inadequate. In fact, not even the empirical literature has been able to agree in the evidence. To generalize the natural resource industry as a whole neglects primordial differences between sectors and the scale of production, thus leading to inappropriate comparisons across countries. It is also difficult to neglect some of the most intuitive arguments. In the most absurd of cases, if the resource curse were treated as an inevitable outcome in the occurrence of large resource abundance, then such a curse would be avoided if none of the resources were ever found. Hypothetically then, if a country enforces a policy to prohibit any natural resource exploration or development to the point that its known resource stock is reduced to zero: would this country unconditionally do better? As Roy et al. (2013) puts it: “the notion that having more of any natural resource could be disadvantageous in any circumstance is sufficiently counter-intuitive to merit serious study”.

Much of the symptoms associated to a stagnating economic performance in developing resource-rich countries can be attributed to poor management of the resources associated to socio-political choices and economic policies that eventually carried different detrimental distortions. These choices and policies however are not the direct responsibility of the abundance of resources, but rather shaped in part by the local and international macroeconomic and political scene. Dietshe (2014) identified two main channels through which the literature has focused it attention during the last two decades. The first is the macroeconomic channel, involving effect such as the volatility of international commodity prices and the “Dutch Disease”; and the political channel that deals with rent seeking and quality of institutions.

Development mechanisms and linkages of resource-blessed countries

So what can we learn from "resource blessed" countries? Denmark, Finland, Iceland and Sweden are countries that have reached not only high income levels in terms of GDP per capita while relaying on their primary sector industry; but also have become a benchmark for social protection policies. In the last decades, the performance of the Nordic Region in terms of measures of productivity and inequality, surpass the average of the other OECD member countries.

Smith (2007) suggests three main mechanisms that can explain the development paths for these “resources blessed” economies: 1) development through knowledge upgrading and investment strategies in resource-based industries; 2) development through the leveraging of resource bases into downstream industries; 3) knowledge creation via knowledge infrastructure (Smith, 2007). I agree with the rationale behind this categorization, however I find more suitable to extend the latter by taking into account development through shifts toward new productive sectors via innovation provided human capital and infrastructure capacities.

The intuitive perception that the extractive industry is too “simple” and therefore incapable to promote innovation and spillovers is groundless. As Wright & Czelusta (2004) puts it: “It is fair to say that the minerals sector constituted a leading edge of the knowledge economy in U.S. history”. In fact, “resource-blessed” countries have shown the capacity to create linkages between sectors (mining equipment exports as a result of mining production expertise), even beyond the depletion of the resource. As shown in the figure below, it becomes evident how Chile has not created such linkages when compared. To put this in context, if Chile would like to reach the same level of mining-related exports as a percentage of total mining exports that Canada has achieved, this would imply an increase of more than ten times it current level (Korinek, 2013).

Metallic mining production and mining equipment exports in seven countries in 1987.
Metallic mining production and mining equipment exports in seven countries in 1987. | Source

The above-mentioned development mechanisms can better be explained in terms of linkages across different actors and sectors in the economy. The first two mechanisms in this sense could be attributed to direct linkages within the resource sector, while the third as an indirect linkage with a different type of industry (can be the same or different sector). In order to be clear how the linkages can better be defined for the mining industry, it is important first to review different definitions given in the literature and how the different perspectives could be unified.

Hirschman (1977) first proposed that growth sectors could change the rest of the economy through linkages effects. Particularly, he identified three distinctive types of linkages. These were production linkages (which separated as backward and forward linkages), fiscal linkages and demand linkages. Fiscal linkages make reference to the fiscal spending on public goods given the direct income received from the primary sector activity, while demand linkages could be related to multiplier effect given the consumption from the household earnings. Most recently, the United Nations Economic Commission for Africa published two reports, which investigated the role of the mining-related industries in development for the sub-Saharan region (UNECA, 2004) (UNECA, 2011). They introduce two new concepts, the side stream and lateral migration linkages. Both can be related to the production linkages, the first accounting for auxiliary services suppliers with the potential to be transferable to other sectors, and the second capturing potential upgrades towards technological-intensive processes (UNECA, 2011). In a different study, Morris et al. (2012) reached a similar conclusion when studying industrial diversification within mining, oil and forestry sectors in Africa. The terminology however is different, identifying three types of production linkages: upstream, downstream and side stream linkages (Morris et al., 2012).

Diagram for resources industry development mechanisms and production linkages
Diagram for resources industry development mechanisms and production linkages

So how can we use all of this information? In the diagram shown above, I do an effort to provide a simplified summary to intuitively explain the mining sector production linkages that seem to be required in order to comply with the resource-base development mechanisms described earlier. The square shapes are intended to represent the development mechanisms. The two first mechanisms are explained via direct production linkages (thin arrows) of the core extractive industry with the downstream, upstream and side stream sectors (identified as services and suppliers). The wider arrow represents an indirect linkage that enables a shift (usually triggered by a technological breakthrough) to a completely different new productive sector. I focus in direct production linkages in this article, but this does not intend to imply the latter are less important.

Now we just need to describe then what are the upstream, downstream and what is the role of suppliers. In order to have a better understanding on what the core extractive activity actually represents and how direct production linkages are created, it is necessary to turn towards value chain framework. The main stage of a typical mining value chain is summarized in the upper figure below. Exploration, mining and mineral processing can be taken into account as the core extractive activity (Wellmer et al., 2010) and generally are located within the same geographical location (which is determinate by the mineral deposit location and limited by transportation constrains). It is necessary to explore further on what are the inputs that each stage requires and how mining projects are actually developed. Thus it is necessary to expand the original value chain, in order to identify two categories of inputs: capital goods and services. This is shown in the lower figure below. Examples of capital goods are presented in “italics”, while service goods are denoted with “underline”. I also distinguish the Value Addition and Refining stages from the rest of the process in order to highlight the fact that these could be considered from this point forward as a downstream activity. It is important to notice that the same rationale does not apply for upstream activities. Explorations and discovery of a deposit does not entail an upstream activity, but is part of the mining business itself. I argue that capital goods inputs (as described in the value chain framework) represent the actual upstream industry linkage possibilities, as the development of new machinery or technologies can provide new solutions to the main mining activity.

Mining value chain
Mining value chain

Following this notation, the diagram below shows my preferred framework to analyze the mining value chain from the perspective of production linkages. This is a simplification that only takes into account direct production linkages. Given that my specific objective is to explore only the two development mechanisms associated to direct production linkages. It follows from this analysis that in order to have an adequate identification of the mining sector production linkages, it is critical to have a detailed characterization of the service and good suppliers. The latter will constitute side- or up-stream linkages depending on the technological and knowledge endowment of their business. From this point it could be understood that upgrading of linkages will refer to the creation of up-stream linkages.

Diagram for direct production linkages of the mining industry
Diagram for direct production linkages of the mining industry

Continue to Part II

Click here to read Part II of this article


    0 of 8192 characters used
    Post Comment

    No comments yet.