Wednesday, November 26, 2014

The Natural-Resource Curse Strikes Again

SANTIAGO – Chile today produces one-third of the world’s lithium – used in batteries that power everything from computers to cars – and has great potential to expand that share. But, while everyone agrees that Chile should realize its potential as a global supplier of lithium, the local debate on how to accomplish this has produced more heat than light.

President Sebastián Piñera’s government has attempted to auction off the right to expand lithium production to up to 100,000 tons over the next 20 years. But, as is often the case with natural-resource exploitation in developing countries – though not necessarily in Chile – the process has turned into a tragicomedy of errors, impeding the country’s development. There are lessons in this experience for other natural-resource exporters.  

Piñera’s center-right administration has been rigidly ideological in its approach. Its University of Chicago-trained economists argue that attracting private investment into primary lithium production is all that matters, and that fostering local industries that rely on lithium as an input is not a public-policy goal. So the government held an auction in which domestic vertical integration and value added were not relevant criteria for awarding production rights.

Nor were the auction’s designers concerned about fostering domestic competition. And, because the government chose not to go to Congress for a law authorizing the auction, investors feared that the legal framework was open to challenge. As a result, only three firms submitted tenders, and the initial winner was SQM, one of the two firms already engaged in lithium production in Chile.

The auction was marred by potential conflicts of interest. The mining minister had to take himself out of the process because his brother is a senior manager at SQM, which is controlled by the former son-in-law of the late dictator General Augusto Pinochet. The company has a controversial past, faces a pending dispute with tax authorities, and is a party to several court cases involving the Chilean government. In the end, these cases disqualified SQM and caused the auction result to be nullified.

This is a good opportunity for a fundamental rethink. Chile’s constitution leaves no room for doubt that lithium belongs to the state, so the state will necessarily be a key player in the development of the lithium industry. But no Chilean government-owned company has experience in primary lithium production, or in any of the industrial uses of lithium.

So the time is ripe for Chile to do with lithium what it has never done before with its other mineral riches: develop a comprehensive policy aimed at building a local value-added industry. To achieve that goal, the Chilean state will need strategic partners, which may turn out to be foreign or domestic. And the process for selecting those partners should have the proper regulatory framework and concern for competition that the recent bungled auction lacked.

Chile’s traditional left, arguing that lithium is legally classified as a strategic resource, rules out any further private-sector involvement in its production. Social networks are teeming with claims that if the state retains control over lithium production, the resulting revenue will solve Chile’s problems in financing education, health care, and housing.

But those making such claims have not done their arithmetic properly. Chile’s annual lithium exports amount to a little more than $200 million – just 0.5% of the country’s copper exports. The entire world lithium market involves less than $800 million a year in transactions. Even if technological change causes that market – and Chile’s share of it – to grow, primary lithium production will not provide the revenues needed to fund Chile’s social programs.

A better approach is to develop the skills needed to foster a domestic lithium industry, which can provide good jobs and good wages. This solution is unlikely to please ideologues on either end of the political spectrum. But it is the right solution for Chile.

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    1. CommentedZulfiker Hyder

      Development of skills would require expenditure on education and training, an ability that the Chilean government essentially lacks. On normative grounds this might be the right solution but from a different perspective Chilean government might be better off in letting someone else handle the resource as long as the national interest is prioritized. Government lacks expertise and hosts bureaucracy and this is nothing unusual for any developing country. Under such conditions resources are likely to be wasted if the right to exploit such resource is reserved by the government.

    2. CommentedFarid Solana

      Indonesia encounters the same phenomenon.
      Indeed, the country has 'perfect' constitution. However, it is lack of capability in managing its natural resources. Sometimes, I don't see the importance of having decent constitution if it is unable to transform the (natural) resources into currency or wealth.

    3. CommentedNathan Coppedge

      If production is domestic for Chile, it seems the only difference between domestic industry and international industry is expense. As you've said, in either case the money doesn't amount to a huge difference for national policies. Unfortunately, foreign investment in industry, if it makes a difference for the budget, may be arbitrated in a manner that has very little to do with the location in which the production occurs. If it isn't much real money, there is little defense of the view that local workers would benefit significantly by a domestic product, unless all that is signified is a political message. Of course politicians may want to benefit from the "facts" and not a blind alley. At that point it looks like any clever answer is equally effective. It keeps returning to "a resource is a resource". But if there are other resources, what's the difference? Perhaps we are assuming that the nation of Chile is suffering financially? What about the United States? At what point does labor capital look like the only thing left to gamble with? Some nations might be able to make a great deal out of a labor market, and then as Dyson says the motivation is for education, which doesn't seem like Chile's problem. Is there something especially interesting about Lithium in particular, that it would attract an intelligent labor market? Maybe that is the point you are making---perhaps manufacturing computers in Chile. But it has a reputation for domestic threats that reads similarly to political upheaval to Americans. Whether that matters on a political level must be a different matter altogether. The sense I get out of the article is simply that Americans are intrigued that Chile relates with computers. And as that stands, it looks like the question is, "is there money from nothing?" which at any rate seems to be on some people's minds, as un-serious as it seems so far as it relates to reality.

    4. CommentedProcyon Mukherjee

      A perfect article that brings to the fore the contradictions that get orchestrated when resource endowments have to be opened up for manufacturing and trade and the state must play the vital role as the mediator to ensure that fairness is achieved in allocation of the licenses and the common good is also attained in terms of providing jobs for the local population.

      Whether it is Chile or Odisha in India, which has natural endowments in Bauxite or Coal, the problem is the same and at the end resource richness is locked underground, while poverty thrives above.

      The problem lies in not building the institutions that people can trust, where fairness in allocation can be made transparently visible to the people on one hand and a fair deal for those who are going to be affected due to displacements would not be left to the vagaries of private initiatives.

      But closely that I have seen this happening, the problem lies in the lack of local institutions and village level governance models that finally add up the state level models, where a lot is desired in terms of creating the trust between private and government partnership in allocation of natural resources.

      When lack of trust thrives, the governance models serve the mistaken ends of inaction.

      Finally the poor suffer.

      Procyon Mukherjee

    5. CommentedZsolt Hermann

      As the article itself states this is not a Chilean problem, the same "comedy of errors" is happening all over the world, and not just with natural but with human resources too.
      This comes from 2 roots:
      1. Through our inherent human nature we only care about how much self profit, self benefit we can grab for ourselves from any possible scenario, regardless of wider, and long term implications. I grab whatever I can right now like a little child and do not care about anything else.
      2. We all think that just because we sit over some natural resources, or I, or my culture, nation, family was born with some special talent it is all mine, I can fence it off for myself, and I can do whatever I want with it.
      This double negative attitude sort of worked before, driving human development, progress, exploitation, but not today when the whole of humanity in itself, and humanity within the vast surrounding natural living system, evolved into a closed, interconnected and interdependent system.
      Humanity has become like a single machine with separate cogwheels, where each cogwheel has some special resource, talent, function that is essential for the proper function of everybody else, there are no incidental, or unnecessary parts.
      There is nobody who could stand alone, sustaining itself or survive without the help of all the other parts.
      This is why any benevolent, predictable and sustainable future necessitates a completely new global, human structure, working mutually, reinforcing and using, equally distributing each parts' positives and balancing, helping out each parts' weaknesses without any individual, or local calculations before considering the well being of the whole.

        CommentedEdward Ponderer

        It sounds like something from an old original-series Star Trek episode -- a danger to the precious (di)Lithium (crystals) that star ships depend on. Yet our technologies are vitally dependent on such batteries. But everything now-a-days is dependent upon a whole host of everything else. And we all are dependent upon each others. And of course our lives and technologies tie us in intimately with the natural world as well.

        It is a huge network of interdependence, and mis-balances send shock waves every which way on our multidimensional diaphragm.

        It will take an intelligent network to sense and balance matters, and we humans can be that network if we would but link sensitively in mutual responsibility, rather than selfishly by figurative (and not so figurative) meat hooks.

        Well-spoken Mr. Hermann. Hopefully well-heeded as well.