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ROLE OF COPPER IN CHILEAN & ZAMBIAN ECONOMIES

ROLE OF COPPER IN CHILEAN & ZAMBIAN ECONOMIES. Patricio Meller & Anthony Simpasa. Content. Copper Production Importance of Cu in Chile/Zambia Copper: Curse or Blessing? Copper: $ Dutch Disease? Institutional Rules Conclusions.

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ROLE OF COPPER IN CHILEAN & ZAMBIAN ECONOMIES

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  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. Source : WEO, Central Bank of Chile and Zambia, CSO, World Bank.

  4. Copper output (kMT) in Chile and Zambia 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

  8. Importance of Cu in Chile/Zambia

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

  10. 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 • 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 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

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