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Chile’s First Fulbright Scholar Reflects on Chile’s Political Economy 1957-1970

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When I arrived in Santiago in early January 1957 I was met by John Rhodes, Cultural Affairs Attaché at the US Embassy. A bon vivant,guest blog John was well connected with Santiago’s cultural-intellectual community. He opened doors for me that proved invaluable for the pursuit of my research project that focused on Chile’s U.S.-owned copper mining industry, la Gran Minería – the topic of my doctoral dissertation at The Ohio State University. John and I established a friendship that endured long after my year in Santiago. He introduced me to Dr. Joseph Grunwald, director of economic research in President Carlos Ibáñez’ National Planning Office (ODEPLAN). Joseph offered me the use of an office that I accepted with pleasure. He introduced me to Drs. Simon Rottenburg and Tom E. Davis from the University of Chicago, both of whom served as visiting faculty in the then recently established exchange program between Chicago’s economics department and its counterpart at the Universidad Pontífica Católica de Chile. They also offered me a small office of which I made use from time to time.

When the local Fulbright Commission was established in February or March, I was advised to enroll in the University of Chile. Blocked by bureaucratic red tape, or trámites, I failed in my quest to matriculate in the university. Nevertheless, with the help of Professor Jorge Ahumada, I “enrolled” in his semester-long course on “Global Programming.” Jorge, a high-ranking official in the Economic Commission for Latin America (CEPAL), introduced me to his colleagues and to that organization’s library – then the best collection of economic monographs and official documents in Latin America. Because we lived close to one another (I had an apartment on Avenida Providencia that afforded a spectacular view of the Andes), he often drove me to his evening class. Our student-professor connection kindled a friendship that was to continue through correspondence long after 1957. Clearly, as an impecunious graduate student in Santiago, I was afforded the opportunity to view Chile’s economic problems through a wide lens that spanned CEPAL’s Prebisch Thesis to the Chicago School’s free-market approach.

While in Santiago, I joined the Instituto Chileno-Norteamericano and spent many a weekend during June-August as a guest in the Institute’s refugio at Farrellones, 9,000 feet up the Andes. Among my friends there, they taught me the basics of skiing and afforded me the pleasure of barbecued goat – a Chilean specialty. In the company of John Rhodes, I was invited to attend Gabriela Mistral’s state funeral, a moving experience that taught me that Chileans honor their poets.

This article represents my impression of one episode of Chile’s evolving political economy. It revisits the often-conflictive relationship between the Chilean government and the two U.S. copper mining companies, known locally as La Gran Minería. It is important to point out that under the authoritarian military regime headed by President Augusto Pinochet (1973-90), Chile became the precursor of free market liberalism in Latin America and of comprehensive privatization in the world.

Big Copper: Chile’s La Gran Minería, 1955-70

An outstanding feature of Chile’s economy since the mid-1920s has been its considerable dependence on the export of a single primary commodity – copper. Moreover, until the late 1960s, the affiliates of two U.S.-owned firms – the Anaconda Company and the Kennecott Copper Corporation –dominated Chile’s copper mining industry, a fact that from time-to-time posed conflict between the nation’s long range economic opportunities and more immediate political realities. (The information included in this section was largely derived from Baklanoff, 1961, 1975 and 1983).

Although mining operations took place in so-called “export enclaves,” the U.S. companies exercised a powerful impact on the Chilean economy by virtue of their sizable tax payments, purchases from local suppliers, and outlays for wages, salaries, and fringe benefits. “Big Copper” (known locally as la Gran Minería) referred to those companies that were highly mechanized and annually produced at least 75,000 metric tons of smelted or refined copper. During the 1960s, la Gran Minería produced from 85 to 90 percent of Chile’s copper. In 1970, the physical operations of Big Copper took place in three mining sites involving the application of a high degree of mechanization and technical expertise. Large-scale output permitted extraordinary efficiency, enabling the U.S. companies to produce at low unit costs.

The experience of Anaconda and Kennecott in Chile from the mid 1940s to 1970 showed the following significant highlights: 1) Chilean policy toward the U.S.-controlled copper companies proved to be erratic, shifting between a posture of pragmatic accommodation to the application of onerous and counterproductive tax measures; 2) company responses to these changing climates were highly elastic, that is, decisions to invest, expand output, and engage in exploratory operations positively were correlated with official measures that promised long-run tax stability, moderate tax rates, and security of property.

The Chilean treasury could capture an ever-growing share of la Gran Minería’s income – but only at the cost of repelling new foreign investment in copper mining and consequent erosion of the future tax base. Given this short-sighted political orientation and the country’s limited market power in the international copper economy, Chile lost at least two foreign direct investments in its key export sector. Instead, heavy taxes, including foreign exchange penalties, and other inhibiting measures induced the U.S. copper companies (which operated on a global scale) to abandon expansion plans in Chile and direct capital funds to less productive mineral sites in other countries offering a more favorable investment climate.

The “New Deal” Law of May 1955, supported by influential elements of Chile’s business, scientific, and engineering communities reversed the declining production trend. The U.S. enterprises invested $200 million in copper mining facilities, increased output by one-half, and materially raised the level of Chile’s proven copper reserves through their exploratory activities. But beginning around 1961, the investment climate for Big Copper again deteriorated: expropriation of the U.S. companies became a clear possibility; new copper taxes were imposed; company profits again were squeezed; and their ambitious second phase expansion program shelved. Had Chile agreed to a 20-year tax guarantee provision in 1961 (the U.S. companies’ condition for initiating the second phase of the expansion program), the nation would have increased its capacity to produce an additional 390,000 metric tons of copper. By failing to reach an accommodation with the U.S. enterprises at that time, Chile lost according to my estimates, roughly $1.5 billion of net foreign exchange income between 1965 and 1969 when the expansion program would have been completed. Big Copper’s behavior suggests the application of an industry-specific Laffer Curve, i.e. lower tax rates over the medium-term yielded growing tax revenues for the Chilean government.

A decisive shift in the mid-1960s of Chile’s balance of political power in favor of the Christian Democrats provided the opportunity for a new initiative toward the U.S. companies. President Eduardo Frei Montalva’s (October 1964 – October 1970) “Chileanization” or partnership policy, elicited a favorable response from both Anaconda and Kennecott. A $600 million expansion program got underway. Designed to dramatically raise la Gran Minería’s copper production and exports, the program was expected to transform Chile into the world’s leading copper exporting nation by 1972, as well as to vest in the Chilean government full control and ownership of the mines.

Castro and Allende

Chilean President Salvador Allende speaks with his mentor, Cuban dictator Fidel Castro, in 1971. Castro stayed in Chile for two months to advise him on how to make Chile more like Cuba. (www.hacer.org)

The election plurality and Congressional backing of Salvador Allende, the candidate of Unidad Popular (embracing Communists, Socialists, Radicals, and Independent Leftists) foreclosed any arrangements with the large U.S. copper companies other than expropriation. Upon taking office on 4 November 1970, Allende decided that a constitutional amendment was the only procedure whereby the state could release itself from the bindings placed on it by the “Chileanization” and “Pacted Nationalization” agreements. In brief, the Marxist regime had to “unmake” the work of President Frei and insure that the so-called “Integral Nationalization” of the large copper mines would not be “exposed to the interminable discussions before regular courts of justice.”

The “Integral Nationalization” gave on first reflection, the appearance of a concern for legal scruples. The measure was carried out through a constitutional amendment approved by the Chilean Congress. However, the nationalization bill, signed into law on 16 July 1971, and as interpreted by President Allende, specifically denied the large U.S. copper mining companies the right of recourse through the regular courts of law to the Chilean Supreme Court. Further, the Special Copper Tribunal, created by authority of the amendment and appointed by Allende, denied the petitions of the U.S. companies for reconsideration of the deduction of alleged “excess profits” from any compensation paid them for their expropriated assets on grounds of “the absolute incompetence of the Court to know such matters.” Significantly, Enrique Urrutia, president of the Special Copper Tribunal, who served concurrently as president of the Supreme Court of Chile disagreed with the tribunal’s decision.

The amendment authorized the president to make a series of deductions from the value of compensation including alleged “excess profits” earned by the US companies from 1955-70. This deduction of $744 million transformed the U.S. copper mining companies from creditors to debtors. Their assets and future earnings prospects were wiped out in a single political act. Professor Novoa Monreal, in his comprehensive treatise La Nacionalización del Cobre (1972, 176), argues that the dedication of excess profits retroactively would have been impossible in accordance with existing legal principles. My conclusions, based on the analysis of profit as a percent of U.S. equity) for the 1955-70 period was 11.8 percent – hardly an excessive rate for the mineral extraction sector – and within Allende’s “reasonable profit” guideline of 12 percent (See Table I below). In short, the “excess profits” allegation was unfounded.

Copper

Under the ideologically inspired Allende administration, Chile’s international credit standing was impaired, mine output remained far short of targeted production capacity, and with unit costs escalating the surplus of copper revenues over costs virtually disappeared. “Human capital” – the more than 400 Chilean managers and technicians trained by Anaconda and Kennecott – was lost to the nation. They were replaced, according to correspondent Normal Gall, by “swarms of new nontechnical personnel, such as sociologists and psychologists and public relations men who plunged into political work on behalf Unidad Popular or infantile rivalries among themselves.” (Gall, 1972, 7) David Silverman, the new Communist manager of Anaconda’s Chuquicamata mining complex, told Gall, “There are few people who know about copper and have the government’s confidence.”

The compensation agreements concluded between the subsequent Chilean military regime and the U.S. copper mining companies during 1974 essentially satisfied legal tests of adequacy and effectiveness. Although the Pinochet regime is generally recognized for its privatization efforts, the U.S. copper companies remained state-owned. Following their nationalization, the large copper mines subsequently were operated by a government-owned enterprise, Corporación del Cobre (CODELCO).

Posted in: No Trespassing
Eric N. Baklanoff

About the Author:

Eric N. Baklanoff (1925 - 20140 was Board of Visitors Research Professor of Economics Emeritus at the University of Alabama (UA)where he also served as Dean for International Programs (1969-1974). Before joining UA, he directed Louisiana State University’s Latin American Studies Institute and Vanderbilt University’s Graduate Center for Latin American Studies. He published twelve books, among them Expropriation of U.S. Investments in Cuba, Mexico and Chile (1975), The Economic Transformation of Spain and Portugal (1978), and Agrarian Reform and Public Enterprise in Mexico: The Political Economy of Yucatán’s Henequen Industry (with Jeffery Brannon, 1987). Dr. Baklanoff was a Fellow at the Center for Advanced Study in the Behavioral Sciences at Palo Alto, California and was the recipient of eight other post-doctoral awards. From 1950-54 he was associated with Chase National Bank working from 1951-54 in their Puerto Rican branches. In 1957 he became Chile’s first Fulbright Scholar. His articles have appeared in Economic Development and Cultural Change, National Tax Journal, Inter-American Economic Affairs, World Development, Portuguese Studies Review, Mining Engineering, Revista Brasileira de Economia, Journal of Developing Areas, AEI Foreign Policy and Defense Review, the Luso-Brazilian Review and other scholarly journals. After his retirement in 1992, he continued to publish scholarly articles and served as a consultant on Portuguese Economic Affairs to the Library of Congress, both the Federal Research and Hispanic Divisions. Dr. Baklanoff was a founder member of the University of Alabama’s Emeriti Committee for International Strategic Studies. Dr. Baklanoff was educated at Ohio State University (B.A., M.A., and Ph.D.).

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