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

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Presentation on theme: "ROLE OF COPPER IN CHILEAN & ZAMBIAN ECONOMIES Patricio Meller & Anthony Simpasa 1."— Presentation transcript:

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

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

3 3 Source : WEO, Central Bank of Chile and Zambia, CSO, World Bank. Basic Data: Chile and Zambia 2009 ChileZambia Population (millions)1712 Yn/cap (US$ PPP)14,2991,544 GDP (billions US$)24318 Territory (km 2 )755,839752,614 Total Exports (2008; billions US$)665 Copper Exports (2008; billions US$)33 (50%)4 (80%) World Copper Reserves Share (2008)36% (1 st )3.5% (9 th )

4 Copper output (kMT) in Chile and Zambia ChileZambia 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 5

6 Chilean and Zambian Share of World Copper Production Source: World Bank and COCHILCO 6

7 Overview Chile/Zambia Cu Ownership ChileZambia 1900 – 1970Private Ownership 1970/71Nationalization 1990s  Foreign I (Co-  Pub/Priv) Privatization

8 Importance of Cu in Chile/Zambia ChileZambia X-Cu/X-T70%40%95%80% Cu/Fiscal Rev.4%8%-15%2%-4% I-Cu (Annual BUS$) Employment1%-2% 15%7% Cu (%GDP)6%6.5%10%6%

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

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

11 Copper: Curse or Blessing? Blessing (  P-Cu): Positive effects in Chile/Zambia – Trade Balance, K Inflows, Growth Copper:  Dutch Disease? Dutch Disease (  P-Cu): – Chile: No  Dutch Disease:  G=0;  X-MF=0;  e=0 – Zambia:  Dutch Disease:  G  0;  X-MF  0;  e  0 – What does explain the difference?

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

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

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 16 Source: Otto et al, Copper mining royalties applied in selected countries Country/RegionRoyalty TaxBasis 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% 5% Taxable income Zambia3% ad valorem on net residual value (RNF)

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 20


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