Describe and analyse the benefits and challenges of Chile's commodity-dependent economy. There are strong bounds between Chile’s economic downturns and growths with copper. Having an economy that is dependent on a single commodity can be a challenge. Although focusing on the abundant product gives a country-comparative advantage, too much dependency can result in Dutch disease.

1. Assessment 5:
Describe and analyse the benefits and
challenges of Chile ́s commodity-
dependent economy.
BSA5904: Political, economic, and business dynamics in Chile and Latin America
SEYED ROHAM HOSSEINI
Master of International Business
Shos0004@student.monash.edu

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Contents
Introduction....................................................................................................................3
Discussion......................................................................................................................4
Benefits ......................................................................................................................4
Challenges..................................................................................................................8
Price uncertainty:.................................................................................................11
Welfare ................................................................................................................12
Recycling .............................................................................................................13
Conclusion...................................................................................................................13
Bibliography ................................................................................................................16

3. 3
Introduction
Commodity dependent economies are referring to the countries that most of their GDP
is dependent on raw materials and its exportation. The economy of these countries is relying
on the exchange rate and the price of that commodity in the global market. These countries
face several risks and also several opportunities (Poncela, Senra, & Sierra, 2017). With proper
governing and regulations and using the resources wisely these countries can become
developed nations. Although using commodity incomes is a very attractive way to develop, it
can result into economic down falls and crisis. There is no single best path for commodity
driven economies to use to link their commodities with diversified industries, however, these
countries can learn by example and learn how developed countries passed this stage with
industrialization or focusing on service sector.
There are strong bounds between Chile’s economical downturns and growths with
copper. Having an economy that is dependent on a single commodity can be a challenge.
Although focusing on the abundant commodity gives a country comparative advantage, too
much dependency can result in Dutch disease. Chile as the fastest growing economy in the
Latin America (The World Bank, 2017) is vulnerable to the price fluctuations. Considering due
to limited supply of copper and the high demand for it its price is increasing, and it helps
Chilean economy to grow by creating more jobs with new opportunities, it can make the
economy vulnerable. Knowing that all the mineral sources are durable and has life span relying
the whole economy on a single commodity means dealing with it downturns. Chile is not the
only economy in the world that relies on commodities. Some of the most advanced economies
in the world have followed this path and used their commodities to diversify and link their
economy with sustainable development models.
As challenging as it is to create an international network for a single commodity and
diversity the market for other industries, Chilean government is promoting all the Chilean

4. 4
products in the international market through ProChile which is step forward to become more
sustainable economy. Diversification is going to help Chile to continue its development and by
doing so there will be other strong industries which will replace the mining when it will lose
its profitability. Considering all the challenges mining has for the country still it is one of the
fastest paths to development. Besides copper, the second and third main exports of Chile are
agricultural products and fishes (OEC, 2018). Even though they are more sustainable than
mining, they are not big industries in Chile that can become a replacement for copper.
Discussion
Benefits
Copper industry is facing global increase in the demand (ICSG, 2017) due to the fall in
the global supply the price of the commodity has been increasing sharply (Figure 1- Copper
price changes image extracted from ). All of the commodity driven economies experience
fluctuations based on the supply and demand. These economies are not homogenous in the
Figure 1- Copper price changes image extracted from (Heimlich, 2017)

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structure of their political and economic orientations (Ali, Chaubey, & Camp, 1995), however,
specializing in an industry helps the country to gain economy of scale and improve the
productivity. Looking at the path Australia took by exporting mining services (Australia:
Growing Australia's mining services exports, 2017) can be a role model for Chile to diversify
its economy by using the expertise they gained by becoming the main exporter of copper and
export it as mining services to other countries. Considering that lithium can replace the copper
in the economy knowing Tesla showed interest to be their supplier (Home, 2018), but the
Chilean government should focus on diversification and have long term plans to switch to
sustainable sources for the economy. Chilean economy is benefiting from the single commodity
in the following ways: using it as a comparative advantage, specializing in the industry and
using the economy of scale, education, creating strong networks and reliable demands,
economic openness.
Comparative Advantage:
Firstly, producing copper and focusing on this mineral gave Chile the economy of scale
and CODELCO got the opportunity to reduce the cost of production during the down turn of
copper price (2012-2016). This cost management gave them the opportunity to gain a margin
while the prices started to grow during 2017 which helped them to make more profit than the
similar period in the year before that (CODELCO, 2017). Specializing in the copper, creating
international network to supply the clients in the main market, and gaining the economy of
scale by producing single abundant entity created a unique opportunity (Helpman, 1981) for
Chilean economy. Having copper as a comparative advantage means Chile will always benefit
from specializing in copper. Considering that copper like any other mineral sources will
exhaust at some point, using this comparative advantage to dominate the world market can
open a lot of opportunities to the Chilean economy. Becoming the most efficient economy in
terms of copper mining will help Chile to export mining support industries and specialize its

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research and development centres and universities in this field to attract a lot of scholars and
international students to study and develop technology for Chile.
Specialization:
Secondly, specializing in the mining makes Chilean corporations the advantage of
advanced knowledge of copper extraction. They can develop services regarding copper mining
and also focusing research and development on the copper which based on the current rate of
copper usage in the world will result in higher demand in the market (Heimlich, 2017).
Considering that CODELCO has an active R&D department which focused its projects on
making copper more useful, creating more demand for the copper makes more income for
Chilean economy. The more specialized the economy is on a commodity they will find better
tools and methods to extend their market.
Mining Service Industry:
Thirdly, focusing on the mining expertise Chilean had in copper industry, they can
develop their mining service industry. At the moment Chile is a user of mining service industry
by importing machinery and technology from developed countries (OEC, 2018). To become a
service exporter rather than an importer, there should be a focus on research and development
in companies and universities. Considering the development model of China -when the cost of
production started to increase in China they started to develop plants in lesser developed
countries of Africa to reduce the cost of production and gain access to European Union
(Hosseini, 2017)- by increasing the cost of production in mines Chileans can increase their
outward FDI and make market for their service industry and supporting industries in the rest
of the world. Highlighting the inefficiency in the mining industry in the region makes the
mining support industry a unique opportunity for Chile.

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Education:
Fourthly, by taking advantage of the comparative advantage which is copper
production, Chile can enrich its education system and become a market leader in related
industries. Gaining such position in the world will give Chilean universities the opportunity to
study that experience and use the expertise and become the best providers in those subjects.
Similar to the path states universities in the USA took in the past (Goodchild, Jonsen, Limerick,
& Longanecker, 2014). By specialising in the subjects related to the copper industry and mining
support industries the education system of Chile will take a step forward and become more
competitive in the global market and attract lots of international students.
Reliable Demand:
Fifthly, focusing on one commodity creates reliable demand and loyal customers.
Knowing the marketing network of CODELCO and ProChile shows the government is after
creating strong networks with customers by targeting high demand markets. The trend of oil-
dependent economies has a lesson for Chile high dependency on the single commodity can
become a reliability and causes issues (Karl, 2004). Although due to the fast development of
electrical devices the demand for copper has been increased, the price fluctuations can be a
double edge sword for the economy.
Economic Openness
Last but not least, linking commodity dependent economy to economic openness
considering the impact of specialization into a single commodity will increase the trade.
Improving the trade helped Chilean economy to take advantage of copper price fluctuations
and the deficit of the national accounts by having foreign exchange reserves (Central Bank of
Chile, 2018). The economic openness with the Chilean fiscal policies resulted in economic
development that made Chile the most developed country in the region (Birdsall & Hamoudi,

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2002). On the plus side, mining can ease the economic development and catalyse the change
and become a booster for the further growth (Zvarivadza, 2018).
Challenges
With all the benefits there are several challenges to the commodity dependent economy.
dependent on a commodity will make the economy vulnerable to variety of issues: limited
lifespans, several environmental problems, the price uncertainty, weakening the non-
commodity related industries, and influencing the welfare. Although all of these problems
exist, the commodity is so profitable that most of the commodity-driven economies prefer to
ignore them and focus on their comparative advantage.
Environment Sustainability Challenges:
The main environmental challenges for mining are high energy and water consumption,
water and air pollutions, and carbon footprints (Mission 2016 MIT Students, 2016; Shamsie &
Grinspun, 2010). Like most of Latin American major cities, Chilean cities are suffering from
air and water pollution. The speed of urbanization and the consumers behaviour is polluting
the urban areas as well as the industry that is polluting the mine pits. The climate change is real
and it is impacting Latin American countries more than other nations in the world. Thankfully
the regional governments are aware of climate change and have a mutual understanding of they
have to deal with it, however, being commodity dependent is not a good mixture with
environmental protection. Specially when that commodity is a mine that is impacting the
environment itself.
Sustainability:
Environmental compliance can be very costly; however, the mining corporations must
comply with international regulations and industry standards (Zvarivadza, 2018). Compliance

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with the sustainable mining will increase the cost in the mining corporation which reduced the
lifespan of a mine’s profitability. In addition to that, mining causes a lot of environmental
pollutions and requires access to water sources. Although Chile has access to water, the
drinking water is scarce like most of the countries in the region.
Pollution:
Mining pollutes its surrounding areas, copper mines are mostly open pits and they are
the most hazardous places for the environment. They endanger the old rocks from different
geological eras, they pollute the water, the mining processes and refining copper pollutes the
air (Mission 2016 MIT Students, 2016), also by deforestation they are increasing the speed of
climate change (Bennett, 2017). After the Paris agreement, Chile agreed to ratify and meet the
requirements of that agreement (UN, 2016). Considering the huge challenges of pollution and
its effects on health and welfare of the society it is important to notice that renewable sources
are more sustainable and less pollutive.

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Scarcity of Minerals
According to MarketLine, CODELCO has a very strong position in the global market
by massive diversification in their geographic presence. Also, they know where their customers
are and made strong relationships with them, however, their operational performance has been
declined and because of the nature of the industry they always have limited liquidity position
(2016). According to Heckscher–Ohlin model, when an economy is specializing in an abundant
commodity it will reduce the opportunity cost and will result in efficient production. While
single commodity brings economy of scale, the price of abundant resource will increase due to
scarcity of it and soon it will become the same price as the rest of the world (Salvatore, 2013).
Figure 2 – Chilean economy’s dependency on copper image extracted from (Comelli & Ruiz,
2016)

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Considering the lifespan of copper mines (five to seventy years (Statista, 2018)) cost of
extracting this commodity is increasing day by day and the mine loses its purity.
Price uncertainty:
Figure 2 – Chilean economy’s dependency on copper image extracted from shows
Chilean GDP and FDI is strongly dependent on copper’s price and each price fluctuation causes
the GDP to grow or decline which affect the GDP per capita and national income. Considering
the level of economic dependency to copper as it is shown in the Figure 2 – Chilean economy’s
dependency on copper image extracted from , while the price of copper is affecting the
exchange rate and its contribution to the government revenues (Figure 3 – The regression of
copper price and Chile's macroeconomy image retrieved from ) proves the fluctuations of the
copper price influences the whole Chilean economy. Since copper is not a sustainable resource
which means eventually all the copper sources will face scarcity and the cost of mining will
increase the benefit of selling copper it will cause an economic downturn and become a big
challenge for an economy that has as much dependency to copper as Chile.
Price uncertainty always has been a risk for commodity dependent economies, oil
exporter countries to control the risk has created alliances and organisations to control the
market at some extends (Karl, 2004). The price uncertainty effects the exchange rate, the
psychological behaviour of the market, and it also affects the client networks and customers.
The price fluctuations forced CODELCO to consider strategies to restructure its business and
reduce the cost of production (CODELCO, 2017). Understandably now the government knows
the risks and have fiscal and financial policies to overcome the fluctuations. These fluctuations
influencing the foreign investors and might distract them from Chilean market (Comelli &
Ruiz, 2016).

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Welfare
Understandably as Figure 2 – Chilean economy’s dependency on copper image
extracted from and Figure 3 – The regression of copper price and Chile's macroeconomy image
retrieved from shows, Chile is so dependent on copper that the changes of its price and the
demand is driving the economy. Although the size of copper industry has its benefits and gives
Chile the economy of scale and gave them the upper hand in the global market, it means all the
aspects of the country’s economy is dependent on a source that will end someday.
Figure 3 – The regression of copper price and Chile's macroeconomy image
retrieved from (Comelli & Ruiz, 2016)

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Unemployment:
According to Shamsie & Grinspun research the unemployment in Latin American
region is the root of the poverty (2010). Dependency on the copper made the job market
competitive and require advanced qualifications to be able to join the workforce. At the other
hand, using robots in the mines is declining the working opportunities for less-qualified
workers whom used to work as miners. Also, considering the statistics of the higher education
graduates in Chilean workforce, increases the unemployment rate.
Inflation:
The changes in the price of copper influence the fiscal and financial policies of Chile.
When the commodity price is declining, considering the external balance of Chilean economy
Peso will be depreciating which leads into inflation (Salvatore, 2013). With proper planning
this challenge can be averted and become a point of development for the economy. Figure 3 –
The regression of copper price and Chile's macroeconomy image retrieved from shows all of
the macroeconomic indicators of Chile has been influenced by copper price fluctuations for a
long time and inflation is not an exception.
Recycling
Not Chile nor any Latin American country has proper regulated recycling system
(Global Recycling, 2017). It might not seem necessary because at Chile they export copper at
its purest form. Although for a commodity-driven economy it might not seem necessary to
recycle and use their resources properly, scarcity of resources will force most of the commodity
driven economies to face the fact that the mineral sources are not eternal.

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Conclusion
The resource driven economy can become a platform for further development - the path
some of developed nations of the world took- promoting diversification with an eye on the
changes in the market and requirements of the global market is a shortcut that can sustain the
economic development even after the lifespan of mines (Bastida, 2014). Mining sustainability
is relatively new subject; however, the sustainable mines will not destroy the environment and
will improve the welfare of the society by saving the environment. Spending billions of dollar
to make mines sustainable will pay off by limiting the environmental destruction which will
lead to improved community welfare.
With lithium a new opportunity showed itself to Chile to replace the copper in the
future. Linking the lithium with renewable goals of the government which is building a solar
plant in North Chile shows a new emerging industry in Chile which can give them an absolute
advantage in the energy exporting in the region. Linking copper to renewable energy sources
and using lithium to store them can make Chile a market leader in energy exportation.
The price fluctuations of coppers affected the economical sustainability, to prevent that
Chilean government is using national reserve for foreign currency. This source can be used to
work on renewable resources and diversification of the economy. Chilean government can
learn from some other former commodity dependent economies –Such as Dubai and Australia-
diversification into service sector, tourism, education, and mining services will give Chile the
opportunity to grow no matter the scarcity of minerals.
At the moment the green taxes in Chile are not being used for sustainability. Focusing
on the environmental issues of the copper mines, it is important to focus it on sustainability of
mines and creating more renewable sources and sustainable competitive advantage. Knowing
the huge potential of agriculture and fishing in Chile, the economy can use them as

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diversification opportunities and become a market leader in many other industries besides
copper.
Due to the increasing demand for copper in the world due to production of electronical
devices and power grids, Chile will face another boom in its economy. However, they should
focus the new income on becoming less dependent on a single commodity. Learning from
developed countries, recycling is an effective way to use metal-based minerals. Giving a second
life to the used mineral can reduce the cost of production. Also legalizing the recycling will
have other benefits for Chile as well such as reducing the carbon footprint, reducing the
pollution, and job creation by shifting informal job market to formal job market.

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