World’s Copper King Is Finally Kicking the Habit After 50 Years

  • President Bachelet says productivity drive set to bear fruit
  • Chile’s growth has stalled since copper prices tumbled in 2014

President Michelle Bachelet says her administration has laid the basis to achieve what no other Chilean government has managed to do for half a century -- break the nation’s copper addiction.

The emphasis on productivity, innovation, education and research is changing the economic culture of the country, Bachelet said in an interview in the presidential palace in Santiago Friday. The Socialist party-member spoke as she enters into the last year of her second four-year term.

Michelle Bachelet on Jan. 20.

Photographer: Cristóbal Olivares/Bloomberg

“I am convinced that in 10 years, and hopefully before, with all the things we are doing with the productivity agenda, with growth, Chile is going to be a far more diversified economy,” Bachelet said. “We can make that jump towards development.”

The decade-long copper boom that ended in 2014 pushed Chile to the edge of developed-nation status, with gross domestic product per capita approaching levels seen in countries such as Portugal. Then copper prices tumbled and the forecast of former President Sebastian Pinera that Chile would be a developed nation by 2018 suddenly looked hopelessly ambitious. Now, says Bachelet, Chile is laying the groundwork to make that final leap.

As part of an ambitious education reform, Bachelet’s government has guaranteed free higher education for all starting in 2020, stepped up public-private partnerships, encouraged the commercialization of university research and only last week, created a Ministry of Science. The Finance Ministry’s productivity agenda alone has 47 different measures, 10 congressional bills and 37 administrative initiatives, involving an investment of $1.5 billion.

“The way to develop is not to do more of the same,” Bachelet said. “The way to do it is exactly what we have been trying to do -- develop an ambitious productivity agenda.”

After copper prices tumbled, Chile has posted its slowest three years of growth since the economic collapse of 1981. At the same time, copper grades are falling, making Chile less competitive with other commodity-rich nations such as Peru.

The state-owned copper giant Codelco is in the middle of an $18 billion investment plan, just to maintain production at current levels.

Social Pressures

While Bachelet’s administration has stressed the productivity drive, many in industry have criticized her for focusing on redistributing wealth, rather than creating it. A 2014 tax law raised fiscal revenue by 3 percentage points of GDP to finance education and health spending. At the same time, labor laws have strengthened the bargaining rights of trade unions.

Bachelet says it was impossible to ignore mounting social demands. Chile has changed since the end of Augusto Pinochet’s dictatorship in 1990, she said.

“The children of democracy are far more demanding, conscious of their rights; they want greater transparency, more accountability,” Bachelet said. “That is called development. You can approve of it or not, but there will always be greater expectations.”

Industry leaders blame her reform program for undermining business confidence, damping investment and growth and exacerbating the impact of lower copper prices. Bachelet’s popularity slumped to 19 percent in August last year, the lowest approval rating for any Chilean president since at least 2006, according to polls by GfK-Adimark, dragged down by a graft allegations involving her son.

Another Year

The central bank cut its growth forecast for 2017 to between 1.5 percent and 2.5 percent last month, from 1.75 percent to 2.75 percent. That will make a fourth year of sluggish growth in a country that has expanded 5.4 percent on average since 1987.

Bachelet said she remains determined to push through her remaining reform package; overhauling the private-pension system, passing two more education bills, finalizing proposals for a new constitution and legalizing abortion in some cases.

Under Chile’s $172 billion pension system, created during Pinochet’s dictatorship, every Chilean pays 10 percent of their wages into a privately-managed fund. While the government has proposed an extra 5 percent levy on wages paid by employers, so far, there are no proposals to take existing funds away from the private fund managers, Bachelet said.

"What is clear to everybody is that pensions in Chile aren’t good," Bachelet said. "The system is good for the market, for the economy, but it’s not good for the people that retire."

EU Ties

Boosting ties with the EU is also on the agenda as the government reinforces its commitment to free trade, even with the arrival of Donald Trump to the U.S. presidency and the “America First” policy outlined in his inaugural speech.

“I believe in free trade not just for theoretical reasons, but also for practical ones,” Bachelet said. “Chile is a country of 17 million people; we can’t depend on the internal market.”

For more on EU talks and a possible pact with the U.K., click here

Neither is Bachelet afraid to court unpopularity over immigration. An influx of immigrants last year from Haiti pushed the number of foreigners in Chile to record highs and created a backlash in some cities.

For more on mounting immigration into Chile, click here

Chileans will choose their next president in November of this year, with the new head of state taking over in March 2018.

“I hope they choose someone that allows us to continue advancing toward a country in which the economy can develop, but in which the fruits of that economy are better shared,” Bachelet said.

— With assistance by Laura Millan Lombrana

    Before it's here, it's on the Bloomberg Terminal.