1. ROLE OF COPPER IN CHILEAN & ZAMBIAN ECONOMIES
Patricio Meller & Anthony Simpasa

2. Content Copper Production Importance of Cu in Chile/Zambia
Copper: Curse or Blessing?
Copper: $ Dutch Disease?
Institutional Rules
Conclusions

3. Basic Data: Chile and Zambia 2009
Chile
Zambia
Population (millions) 17 12
Yn/cap (US$ PPP)
14,299
1,544
GDP (billions US$)
243 18
Territory (km2)
755,839
752,614
Total Exports (2008; billions US$) 66 5
Copper Exports (2008; billions US$)
33 (50%)
4 (80%)
World Copper Reserves Share (2008)
36% (1st)
3.5% (9th)
Source : WEO, Central Bank of Chile and Zambia, CSO, World Bank.

4. Copper output (kMT) in Chile and Zambia
1960
532
568
1965
585
685
1970
692
754
Source: COCHILCO, CSO - Monthly Bulletin of Statistics; Bank of Zambia and Ministry of Finance and National Planning

5. Copper Production – Chile and Zambia (kMT)
Source: COCHILCO, CSO - Monthly Bulletin of Statistics; Bank of Zambia and Ministry of Finance and National Planning

6. Chilean and Zambian Share of World Copper Production 1980-2008
Source: World Bank and COCHILCO

7. Overview Chile/Zambia Cu Ownership
1900 – 1970
Private Ownership
1970/71
Nationalization
1990s
h Foreign I
(Co-$ Pub/Priv)
Privatization

8. Importance of Cu in Chile/Zambia
X-Cu/X-T
70%
40%
95%
80%
Cu/Fiscal Rev. 4%
8%-15%
2%-4%
I-Cu (Annual BUS$)
0.4
1.8
0.6
Employment
1%-2%
15% 7%
Cu (%GDP) 6%
6.5%
10%

9. Source: USG Survey (US$-1998)

10. Effect of Cu Price on Macro variables
Chile
Zambia
Net Trade Balance ++
Capital Inflows +
Growth
Government Expenditures (US$)
Government Expenditures (% GDP)
Exchange Rate »0 -
Manufactured exports 10

11. Copper: Curse or Blessing?
Blessing (h P-Cu): Positive effects in Chile/Zambia
Trade Balance, K Inflows, Growth
Copper: $ Dutch Disease?
Dutch Disease (h P-Cu):
Chile: No $ Dutch Disease: DG=0; DX-MF=0; De=0
Zambia: $ Dutch Disease: DG¹0; DX-MF¹0; De¹0
What does explain the difference?

12. Institutional Rules Macro Stability Long Run Fiscal Policy: Royalty
Central Bank autonomy
Long Run Monetary Policy (p target: 2% - 4%)
Fiscal Surplus
Exchange Rate Regime: Clean Free Float
Long Run Fiscal Policy:
Structural Fiscal Surplus (0.5% GDP)
Royalty
Sovereign Funds

13. Structural Fiscal Surplus:
Ministry of Finance uses L.R. g & PCu to calculate structural revenues
Fiscal Surplus (0.5% GDP) is required.
Then
$ Gov. Savings if present PCu and/or g > than L.R.
$ Gov. Deficits if present PCu and/or g < than L.R.
Implications
Gov. expenditure smoothing
Countercyclical macro & social policies

14. Royalty Tax Fact: Foreign Cu Firms were paying low taxes
In Chile Co-$ Priv/Pub Firms => Differences
In Zambia: No taxes paid
Consequence: Pressure for Special Royalty Tax

15. Chilean Production Share - CODELCO and Private Companies (%)
Source: COCHILCO 15

16. Copper mining royalties applied in selected countries
Country/Region
Royalty Tax
Basis
Australia Western Australia 5%
Concentrate: 5% of value
Metal: 2.5% of value
Peru
1-3%
Mobile scale based anual sales
USA Michigan
2-7%
Adjusted sales value
Canada Saskatchewan
5-10%
5% net profits (increasing to 10% according to output levels)
Chile < 20 kMT
20 – 50 kMT
> 50 kMT
0.5% - 1%
1.5% - 4.5%
Taxable income
Zambia 3%
ad valorem on net residual value (RNF)
Source: Otto et al, 2007.

17. Role of Sovereign Funds (Chile)
Rationale (Chilean Sv abroad of Copper Surplus)
Government Expenditure Stability
Intertemporal Redistribution
Prevention of Dutch Disease
Contributions and withdrawals are regulated by a Fiscal Responsibility Law 17

18. Sovereign Funds in Chile
Sovereign Funds allocation: US$ 25 B (15% GDP)
Pension Reserve Fund: Transfers copper resources inter-temporally to finance future pensions = US$ 3.5 B
Human Capital Fund: Finance graduate studies abroad. Stock US$ 6 B. Annual flow from returns finance studies.
Economic and Social Stability Fund: Stock US$ 13.7 B. Annual flow from returns are revenue for Fiscal Budget. In the 2008 crisis, U$ 4.4 B were used.

19. Main Conclusions Copper: Blessing more than curse
To generate positive effects of copper requires => good policy environment
To have good policy environment => State Capacity
State Capacity:
Economic reforms
Better negotiation with Foreign Investors

20. ROLE OF COPPER IN CHILEAN & ZAMBIAN ECONOMIES
Patricio Meller & Anthony Simpasa