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.