However, a new piece from same Prof Velasco is equally interesting. Chile is a natural resource rich country. Usually famous for Copper, it also has large Lithium resources. As lithium is used in batteries, the idea was to take advantage. So they decided to auction the resources:
President Sebastián Piñera’s government has attempted to auction off the right to expand lithium production to up to 100,000 tons over the next 20 years. But, as is often the case with natural-resource exploitation in developing countries – though not necessarily in Chile – the process has turned into a tragicomedy of errors, impeding the country’s development. There are lessons in this experience for other natural-resource exporters.
Piñera’s center-right administration has been rigidly ideological in its approach. Its University of Chicago-trained economists argue that attracting private investment into primary lithium production is all that matters, and that fostering local industries that rely on lithium as an input is not a public-policy goal.
The auction was full of problems:
So the government held an auction in which domestic vertical integration and value added were not relevant criteria for awarding production rights.
Nor were the auction’s designers concerned about fostering domestic competition. And, because the government chose not to go to Congress for a law authorizing the auction, investors feared that the legal framework was open to challenge. As a result, only three firms submitted tenders, and the initial winner was SQM, one of the two firms already engaged in lithium production in Chile.
The auction was marred by potential conflicts of interest. The mining minister had to take himself out of the process because his brother is a senior manager at SQM, which is controlled by the former son-in-law of the late dictator General Augusto Pinochet. The company has a controversial past, faces a pending dispute with tax authorities, and is a party to several court cases involving the Chilean government. In the end, these cases disqualified SQM and caused the auction result to be nullified.
Amazing similarity to the 2G spectrum and coal allocation in India. Yes there were no auctions in India for these two but just random allocation but overall the natural resources ended up going to tainted companies and then cancelled. Much the same story. The natural resource curse is becoming the allocation curse as well.
Prof Velasco suggests a different idea as a solution. He says instead of just auctioning Lithium, the government shoudl try and develop Lithium application industry. This will be an industrial policy of sorts:
This is a good opportunity for a fundamental rethink. Chile’s constitution leaves no room for doubt that lithium belongs to the state, so the state will necessarily be a key player in the development of the lithium industry. But no Chilean government-owned company has experience in primary lithium production, or in any of the industrial uses of lithium. So the time is ripe for Chile to do with lithium what it has never done before with its other mineral riches: develop a comprehensive policy aimed at building a local value-added industry. To achieve that goal, the Chilean state will need strategic partners, which may turn out to be foreign or domestic. And the process for selecting those partners should have the proper regulatory framework and concern for competition that the recent bungled auction lacked.
Chile’s traditional left, arguing that lithium is legally classified as a strategic resource, rules out any further private-sector involvement in its production. Social networks are teeming with claims that if the state retains control over lithium production, the resulting revenue will solve Chile’s problems in financing education, health care, and housing. But those making such claims have not done their arithmetic properly. Chile’s annual lithium exports amount to a little more than $200 million – just 0.5% of the country’s copper exports. The entire world lithium market involves less than $800 million a year in transactions. Even if technological change causes that market – and Chile’s share of it – to grow, primary lithium production will not provide the revenues needed to fund Chile’s social programs.
A better approach is to develop the skills needed to foster a domestic lithium industry, which can provide good jobs and good wages. This solution is unlikely to please ideologues on either end of the political spectrum. But it is the right solution for Chile.
A comment on the article sums up Indai comparison well:
Whether it is Chile or Odisha in India, which has natural endowments in Bauxite or Coal, the problem is the same and at the end resource richness is locked underground, while poverty thrives above.
The problem lies in not building the institutions that people can trust, where fairness in allocation can be made transparently visible to the people on one hand and a fair deal for those who are going to be affected due to displacements would not be left to the vagaries of private initiatives.
But closely that I have seen this happening, the problem lies in the lack of local institutions and village level governance models that finally add up the state level models, where a lot is desired in terms of creating the trust between private and government partnership in allocation of natural resources.
When lack of trust thrives, the governance models serve the mistaken ends of inaction.
Finally the poor suffer.