10 Effect of Cu Price on Macro variables ChileZambiaNet Trade Balance++Capital Inflows+GrowthGovernment Expenditures (US$)Government Expenditures (% GDP)Exchange Rate»0-Manufactured exports10
11 Copper: Curse or Blessing? Blessing (h P-Cu): Positive effects in Chile/ZambiaTrade Balance, K Inflows, GrowthCopper: $ Dutch Disease?Dutch Disease (h P-Cu):Chile: No $ Dutch Disease: DG=0; DX-MF=0; De=0Zambia: $ Dutch Disease: DG¹0; DX-MF¹0; De¹0What does explain the difference?
12 Institutional Rules Macro Stability Long Run Fiscal Policy: Royalty Central Bank autonomyLong Run Monetary Policy (p target: 2% - 4%)Fiscal SurplusExchange Rate Regime: Clean Free FloatLong Run Fiscal Policy:Structural Fiscal Surplus (0.5% GDP)RoyaltySovereign Funds
13 Structural Fiscal Surplus: Ministry of Finance uses L.R. g & PCu to calculate structural revenuesFiscal 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.ImplicationsGov. expenditure smoothingCountercyclical macro & social policies
14 Royalty Tax Fact: Foreign Cu Firms were paying low taxes In Chile Co-$ Priv/Pub Firms => DifferencesIn Zambia: No taxes paidConsequence: Pressure for Special Royalty Tax
15 Chilean Production Share - CODELCO and Private Companies (%) Source: COCHILCO15
16 Copper mining royalties applied in selected countries Country/RegionRoyalty TaxBasisAustralia Western Australia5%Concentrate: 5% of valueMetal: 2.5% of valuePeru1-3%Mobile scale based anual salesUSA Michigan2-7%Adjusted sales valueCanada Saskatchewan5-10%5% net profits (increasing to 10% according to output levels)Chile < 20 kMT20 – 50 kMT> 50 kMT0.5% - 1%1.5% - 4.5%Taxable incomeZambia3%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 StabilityIntertemporal RedistributionPrevention of Dutch DiseaseContributions and withdrawals are regulated by a Fiscal Responsibility Law17
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 BHuman 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 environmentTo have good policy environment => State CapacityState Capacity:Economic reformsBetter negotiation with Foreign Investors
20 ROLE OF COPPER IN CHILEAN & ZAMBIAN ECONOMIES Patricio Meller & Anthony Simpasa