Academic journal article The Cato Journal

Wealth through Ownership: Creating Property Rights in Chilean Mining

Academic journal article The Cato Journal

Wealth through Ownership: Creating Property Rights in Chilean Mining

Article excerpt

In 1971, Chile's president Salvador Allende, a Marxist, got congressional approval for a constitutional reform that gave the state "absolute, exclusive, inalienable, and imprescriptible" ownership of all mines, with the declared aim of confiscating four large copper companies belonging to U.S. companies without paying proper compensation. Soon after, the government expropriated those companies and refused compensation arguing that the mines were state property. In this way, a centuries-long legal tradition--stating that miners had a secure stake in their claims--was changed overnight, violating property rights and paralysing all private mining exploration and investment in a country potentially rich in undiscovered mineral deposits.

After the change of government in 1973, the situation remained unaltered, pending a new Constitution that would establish the institutions for democracy and reinstate the traditional property rights in the mining sector. However, to the surprise of many, an unexpected disagreement within the government (generals versus economists) led to the failure of the 1980 Constitution to establish clear mining rights.

The day after the Constitution was approved by referendum, the mining sector began to call for constitutional reform through what would have been an unusual "mining plebiscite," or by means of publishing a law interpreting the Constitution. At that moment Chile laced two important problems: (1) the uncertainty concerning property rights in the mining sector, and (2) a threat to the legitimacy of the new Constitution.

In trying to resolve that crisis, President Allende asked me to move from Secretary of Labor and Social Security to Secretary of Mining on December 29, 1980, soon after the approval on November 4, 1980, of the Social Security Reform. That reform created a universal pension system based on private retirement accounts (see Pinera 1996).

The challenge was to draft a constitutional law that would establish secure property rights in mining, obtain presidential and legislative approval for it, win the assent of the Constitutional Tribunal, and convince local and international entrepreneurs of its rationality, as well as to persuade the public that the national interest had been safeguarded. All of those goals had to be achieved without weakening the legitimacy of the Constitution.

Our team of classical liberal economists had fought hard for a new economic model based on free markets and private property, and for a return to a limited democracy inspired by the lessons of the American Founding Fathers. The 1980 Constitution was a key step toward the second goal since it represented not only the government's decision to return power to civil society, but also set the timing and conditions for the free election of Chile's political representatives.

The Gordian Knot

From the very beginning, I declined to become involved in the emotive discussions about the proposal to privatize Codelco, the huge state-owned company operating the former American deposits. At the time, Codelco produced 8.5 percent of Chile's copper output and generated a similar proportion of the country's export receipts. Of course, I could never have been in favor of the creation of Codelco or of a similar state enterprise, but once it did exist--with a near monopoly position in the mining and foreign exchange sector--and given the exceptional circumstances under which the government had come to office, to have tried to privatize it under a nonelected government would have set off a "holy war" that would have made it very difficult to make progress with the problem whose solution was the priority for Chile.

In real life, the optimal sequence of public policies is very important. It was preferable to open the way for private production of copper (and other minerals) to grow to the point where it predominated, thereby creating new wealth, and only then address the Codelco ownership issue. …

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