The natural-resource curse strikes again

Andrés Velasco, a former finance minister of Chile, is a visiting professor at Columbia University.

SANTIAGO – Chiletoday produces one-third of the world’s lithium – used in batteries that power everything from computers to cars – and has great potential to expand that share. But, while everyone agrees that Chile should realize its potential as a global supplier of lithium, the local debate on how to accomplish this has produced more heat than light.

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. 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.

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.

The opinions expressed here are those of the author, not necessarily those of the World Economic Forum. Published in collaboration with Project Syndicate.

Image: Vehicle tracks seen close to a lithium mine. REUTERS/Enrique Marcarian