Pinochet Did Not Make Chile Safe for Earthquakes

[Judi Lynn]

Posted: March 5, 2010 06:09 AM BIO
Pinochet Did Not Make Chile Safe for Earthquakes

Predictably, free market ideologues have managed to inject themselves into the latest natural disaster in Chile. It is predictable because Chile was the great testing ground for Milton Friedman and 'The Chicago Boys' to experiment with extreme deregulation and laissez faire economics. And at every given opportunity, they will attempt to prove their ideas worked.

In an article in the Wall St Journal, Bret Stephens argues that Milton Friedman style economics made Chile so wealthy that is was able to withstand a devastating earthquake. It's a nice idea, much like the theory of perfect free markets, but unfortunately, it is complete nonsense and provably false. Firstly, the introduction of free market economics to Chile created a massive crisis with declining wages, unemployment and increased food prices. Contrary to reports of 'an economic miracle', Chile was plunged into a deep recession and almost went broke. To combat this, Pinochet was finally forced to nationalize key parts of the economy, notably the banks and the copper industry, to generate enough cash to keep the government operating. Only then did Chile partially recover (but never again did it reach the prosperity pre-Pinochet). Secondly, the stringent building codes that saved Chile from disaster were implemented before Pinochet got into power. Writes Naomi Klein:

There is one rather large problem with this theory: Chile's modern seismic building code, drafted to resist earthquakes, was adopted in 1972. That year is enormously significant because it was one year before Pinochet seized power in a bloody US-backed coup. That means that if one person deserves credit for the law, it is not Friedman, or Pinochet, but Salvador Allende, Chile's democratically elected socialist president. (In truth many Chileans deserve credit, since the laws were a response to a history of quakes, and the first law was adopted in the 1930s).

Another inconvenient fact that Stephens would most likely rather ignore is that Chile plans on rebuilding the country with the money it has saved from its nationalized copper industry. From the Denver Post:

Finance Minister Andres Velasco said it was too early to estimate the economic cost of the quake. He said the Chile's policy of funneling windfall copper profits into a $14.7 billion rainy-day fiscal savings fund would help shoulder the cost of rebuilding.

"Chile has saved for a very long time in order to have the savings to be able to face situations like this," he told reporters.

More:
http://www.huffingtonpost.com/ben-cohen/pinochet-did-not-make-chi_b_486950.html

[protocol rv]

1. Chile's Mining Industry

I took this from http://www.mbendi.com/indy/ming/sa/cl/p0005.htm

It seems most of the copper mining investment is made by private mining companies - ie multinationals. In other words, the industry isn't "nationalized".

Chile is one of Latin America’s most important mining countries and maintains its role as the world’s largest copper producer. As a result, Chile has one of Latin America’s strongest growing economies. Chile’s economic performance improved during 2004 as GDP increased by 4.0% to US$72.0 billion and total exports increased by 40% to US$30.3 billion. Mining accounted for almost 50% of this total with copper exports reaching US$12.0 billion, 40% of the total exports. According to Chile’s state Copper Commission (COCHILCO), investment in the mining industry during the period 2004 – 2008 will reach US$ 15.2 billion. Almost 50% of this total will be invested by CODELCO (Corporacion Nacional de Cobre de Chile), the state copper mining company, with US$11.6 billion being invested in copper projects (new and expansion of existing projects) and US$3.6 billion in gold mining.

The extent of cuprous porphyry ore bodies that exist along the Andean Cordillera are responsible for Chile’s vast copper and molybdenum reserves. Some of the world’s largest opencast mines are located at high altitudes and harsh environments along the cordillera. During 2004 Chile’s copper production reached 5.3 million Mt and Codelco produced 32% of the total, showing that private copper mines surpassed Codelco as principal copper producer in Chile. Other metallic minerals produced are gold (40 Mt in 2004), silver, molybdenum, zinc, manganese and iron ore.

Since the 1990’s, Chile has been the first port of call in terms of investing in South America and, as a result, numerous foreign companies have developed the country’s burgeoning mining sector. Chile is recognised as the mining capital of Latin America, and can be credited with initiating the investment surge to make Latin America the world’s primary mineral target. Apart from Codelco and the private Chilean mining company Antofagasta Minerals, all the major international mining houses are active in Chile (BHP Billiton, Anglo American, Rio Tinto, Placer Dome, Phelps Dodge, Falconbridge, Barrick Gold, Newmont, etc.) Indications are that CODELCO, state owned copper company and ENAP, the state oil and gas company, will not be privatised. The VENTANAS smelter and refinery of ENAMI (Empresa Nacional de Mineria) – state company whose principal function is to promote/encourage mining on a small and medium scale mining – has been transfered to CODELCO.

[Wilms]

3. Private entities might lease the mines, but the mines are nationalized.

The nationalised Chilean mines were kept under state control after the Pinochet's 1973 Chilean coup d'état, despite the junta's pro-U.S. leanings and this is still the case, largely because of public sentiment and because Codelco is a major contributor to the Chilean Exchequer. Codelco pays income tax, all dividends go to the government and it also pays a 10% tax on the export value of copper products and associated byproducts according to Law 13,136.

Article 1 of the Chilean Mining Code<9> states that "The State has absolute, exclusive, inalienable and imprescriptible ownership of all mines" but goes on to say that anyone may prospect for and establish concessions or mining rights for the search or mining of substances. It appears that anyone may apply, including boys down to the age of 15 and girls down to the age of 13. As well as the Mining Code, foreign investors have to observe Decree Law No. 600 which deals with foreign investment and investment contracts<10>. This allows tax invaribility for 10 years from start of production, access to the foreign exchange market and the right to return capital actually brought into the country without being taxed. The tax invariability can be extended to 20 years for companies bringing in US$50 million or more. In return for these concessions foreign investors have to pay a combined tax rate of 42% compared with the current 35%. They may change, but once only, to the current mining tax regime but most have opted for the higher tax rate because gives more certainty to financial planning.

On June 16, 2005, Law 20.026 was published in Chile's Official Gazette ("Diario Oficial"). The Law establishes a specific tax on mining activities, which came in force on January 1, 2006 consisting of a sliding scale according to copper production from nothing below 12,000 tonnes p.a. to 5% above 50,000 tonnes p.a. on production in excess of 12,000 tonnes p.a. Foreign companies that signed a DL 600 contract before Dec 1 2004 and are still liable to 42% tax are not affected by this. Companies bringing in US$50 million or more now can be granted invariability of mining taxation but must pay normal income tax. They must also submit their annual financial statements to external audit and to the Securities and Insurance Supervisor as well as their quarterly statements and an annual report on the property.

A fact not widely appreciated is that mining companies are generally granted generous concessions to allow them to recoup their initial capital expenditures because of the very risky nature of mining. This gives rise to a long initial tax free period and the suspicion that they are avoiding tax<11>. The most important of these in Chilean law are organisation and startup expenses,interest expense,technical assistance,tax losses and asset depreciation, which may be accelerated<12>. This explains why it was some years before Escondida started to pay tax.

http://en.wikipedia.org/wiki/Chilean_nationalization_of_copper

[protocol rv]

4. Common useage for "nationalized"

The common useage for nationalized doesn't match your comment. Under legislation common in most nations, the state always hold ultimate sovereignity over the national territory as well as all mineral rights, rights over air space, and the continental shelves. Whether they lease, concede, or otherwise give rights, they always remain the owners.

Where the individual countries do diverge is in the degree of freedom given the party with the license, concession, contract, or right. In some countries, the concession doesn't have a time limit. In others, it does. The amount and type of subsidiary agreements or permits the party requires also varies. For example, in the USA State of California, a company can own the mineral rights outright, but its ability to extract the minerals is blocked by the state using environmental and other regulations.

Many individuals have a vague understanding of these topics - and this includes government officials, who often are awarded positions based on party allegiance rather than their knowledge of the "back office" and the regulatory framework - this is common in many third world nations in particular.

And this is evident in the Venezuelan government, where quite a few officials in say the Energy Ministry don't understand the way things worked, the way they work now, or they way they ought to work.

People have a tendency to dress up topics when it's convenient. This is of course a result of human nature. It's our nature to make up our minds very fast, using little information, then as more information trickles in, rather than re-analyzing the problem by factoring in the new, we tend to bend it or ignore it, so we can proceed in what is often the wrong path. A classic example is the recent British Prime Minister's statement supporting the Iraq war - even though if he were to look at the facts as he knows them today, he would definitely say the UK blundered by participating in that terrible Bushian adventure.

[Wilms]

5. What part of "all dividends go to the state" are you not getting? n/t

[protocol rv]

6. Most mining companies are private, not public

Codelco's dividents go to the state. But Codelco doesn't have an exclusive on mining operations. I guess you don't get it, Chile isn't a communist country :-)

[Wilms]

7. I think you are clouding the thrust of the arrangement.

Not all countries are subservient to the rich or the corporations. :)

[protocol rv]

9. That's right

But Chile's mining industry isn't "nationalized". It's carried out by a mix of a state corporation and lots of private players, mostly foreign multinationals. And this doesn't make it subservient to "rich corporations".

[Wilms]

11. What part of this do you refute?

Article 1 of the Chilean Mining Code<9> states that "The State has absolute, exclusive, inalienable and imprescriptible ownership of all mines"

[protocol rv]

14. Ownership by the state isn't the same as "nationalized" industry

Let's go over it again:

It's easy to set up a system whereby the state, the owner, signs contracts with foreign companies to extract, process and export the minerals. The industry which arises as a result of such arrangements is not a "nationalized" industry, and companies which carry out such investments are free to list the mines, equipment, and other goodies as "assets" in their books.

In other words, the state owns the mine, the private investor owns the contract, the equipment, and the buildings on top. This isn't considered a nationalized industry.

Sometimes the arrangement even allows for the equipment to be owned by a state concern, and the investor only owns the contract itself -but the contract gives the investor the full right to use the state-owned equipment (which the investor purchased and "gave" to the government) until it's junk.

These contracts are common, they are used to get around constitutional or legal requirements for state ownership, which in practice many governments think are impractical and have to be got around somehow. But they do fool the common man, who mostly sits at home watching El Chavo and drinking beer and doesn't bother to read about these boring, dark, state secrets. But let's be clear, unless you happen to be practicing international law or are involved in international invesments (which I am familiar with), then I wouldn't expect you to know the fine print.

By the way, Venezuela's oil industry is suposedly nationalized, but it does allow for foreign multinationals to own the oil extraction licenses, equipment and oil reserves. They also book these in their ledgers in their home country. For example, Chevron lists the investments it has in Venezuela, and these are carried in their books as Chevron-owned assets (they list the fraction of the Venezuelan company they own, usually around 40 %).

So let's repeat: ownership in Chevron's US books arises from Chevron's ownership of shares in companies it owns together with PDVSA. Venezuela's oil industry is considered to be "partially nationalized". In practice, were the government and PDVSA to follow the law, the operating companies could not be strictly be called "nationalized industry", because foreign investors own a portion of the shares, and they retain control over what the companies do.

[Wilms]

15. Nice opinion piece. I'll stick to the links.

The one I provided says that the mines are nationalized. The one you provide does not refute it.

I fully acknowledge that you have an opinion that differs from that documented fact.

[protocol rv]

2. Chile's Building Code Changes made in 1993 and 1996

Chile's building code was changed and improved in 1993 and 1996. The following is a quote from a Canadian paper:

" code changes made in 1996 in particular have led to a ``majority of Chile's insured risks'' being well designed, and far more likely to survive than ``older counterparts.''"

http://www.vancouversun.com/news/Building+codes+earthquake+shake+explain+Chile+fared+better+than+Haiti+experts/2624152/story.html

[rabs]

8. Neither Allende, Pinochet nor God

could have written a building code that was going to allow some buildings to withstand an 8.8 megaquake. You could have put tons of reinforcing rebar iron rods into the concrete of buildings, but when the earth below them shifts as much as 27 feet one way or the other, something has to give.

Almost all of the buildings that collapsed in cities like Talca, Curico, Linares and others were of vintage adobe construction. The coastal towns and their wooden cottages were wiped out not by the earthquake but by the tsunamis.

The English-language media played up on some of the more modern buildings that tilted over in Santiago and Concepction, but they were the exception. There were hundreds of thousands of structures that did NOT tumble, but that is not sexy-enough news.

[protocol rv]

10. I disagree

it is possible to design a building code for Richter 9,0. This is what Chile's code does. What is not practical is to demolish older buildings and rebuild them according to the new code. And this is what happened in Chile. There's also the question of human error in design of an individual building, obtaining soil data, or outright fraud, as we saw in Turkey, where buildings were built to code, but the materials were shorted steel and cement, which led to the deaths of tens of thousands of people.

I do wonder, why do nations such as Chile not insure in part? They could carry a national earthquake insurance policy for say $10 billion in damage, it would be a form of national savings for the next quake.

[Downwinder]

12. An esoteric question.

Under Friedman Economics, is it incumbent on Government or Business to insure that the consumer has sufficient funds to purchase goods and services?

[protocol rv]

13. Good question

I don't know the answer, but it's a really good question. But I suspect in practice it's both, if you are referring to Business with a capital B, meaning all of business.

Hayek is my favorite economist, he's more liberal and doesn't support too much government intervention.