Copper still plays significant role in Chilean economy

• Pages: 190-192

Page 190

Over the past decade, Chile's economic performance has been distinguished by strong growth and increasing diversification. However, copper has long been a chief determinant of the country's fortunes and still plays a significant role in the economy. In the 1990s, the mining sector and the rest of the economy each grew at an average annual rate of 8 percent-the result of two distinct impetuses: massive capital inflows, which fueled a rapid expansion of production in the mining sector, and profound structural reforms and a stable macro-economic environment, which spurred growth in the remainder of the economy.

In Copper and the Chilean Economy, 1960-98, Antonio Spilimbergo examines the dynamic relationships between world copper price cycles and the Chilean business cycle. His study finds that copper prices influenced short-term fluctuations in the country and may also have had an impact on longer-term growth. With copper likely to remain an important element in the Chilean economy, correlations between copper price cycles and Chilean business cycles may have important implications for the country's policymakers.

Copper's role in the economy

Copper has played-and seems likely to continue to play-a significant role in Chile's exports and GDP, and to a lesser extent in its fiscal revenues. In 1997, for example, copper accounted for 42 percent of Chile's exports, with the mining sector, dominated by copper, accounting for at least 8 percent of GDP. (Since copper-related industrial activity is not included in this estimate, the true impact of copper in the economy is likely to be underestimated in this figure.) CODELCO, the state copper company, contributed 3.6 percentage points to GDP in 1997 and accounted for more than 10 percent of the national government's revenues. Earlier analytical studies, which considered the long-term effects of the mining sector on real exchange rates, wages, fiscal revenues, growth, economic cycles, and inflation, all concluded that copper "has played a crucial role in the Chilean economy."

Impact: Short and long term

To determine the degree to which the copper price cycle is correlated with the Chilean business cycle, Spilimbergo examined the behavior of Chile's GDP and compared the evolution of the main components of GDP with copper price cycles.

For all three...