SA would do well to heed Chile’s lessons in supporting mining sector - Polity

By Sara Gon

The looming judicial review of the government’s controversial Mining Charter this month sharpens attention on what works, and what doesn’t, in stimulating an industry capable of attracting investment, creating jobs and pulling up the growth rate.

Without positive policy interventions – not least lifting the stifling burdens imposed on the industry by the Mining Charter – none of these outcomes can be achieved.

Better policy is not hard to make, and good examples of its effectiveness are not hard to find.

Chile, the world’s leading copper producer, is one example South Africa would do well emulate.

The South American state, which boasts a thriving mining industry today, is classified as a high-income country. It is ranked the 30th most competitive country in the world, and the most competitive in Latin America.

It was not always so, and much of its present status is thanks to the booming mining industry which Chile has had since the early 1990s – when it refashioned its mining law.

The reforms made it easier for investors to come into the country, and provided them with a secure and stable policy environment.

While South Africa has implemented policies which harm miners and hinder mining investors, Chile has worked to encourage those who would like to invest in the country. And it has done so through fairly simple policies.
Among other things, Chile has an ‘invariability’ clause, which guarantees the tax regime for new investors for a period ranging from 12 to 20 years.

There are also no limits on foreign ownership, and foreign investors are not discriminated against. This is a rather different proposition from South Africa, where miners have to give up 26% of their investment – a target the new mining charter wants to push up to 30% (and sometimes to 51%).

The Chilean government also has to generate a revenue surplus every year. It does this by saving some of the taxes it receives from mines in years when the copper price is high. This policy is enshrined in law through the Structural Surplus Fiscal Rule. These accumulated reserves were worth nearly US$15-billion in 2016.

By contrast, South Africa has followed a policy which is the opposite of Chile’s, especially since the Zuma administration came to power. Mining policy is at best, unclear, and at worst, hostile to investment. Mines can be shut down at the whim of mine inspectors (ostensibly for safety reasons). As noted, investors are expected to give away at least 26% of their investment in the name of black economic empowerment. This is supposed to help the poor, but is really a way of making the well-connected rich, or even richer.

The contrast of the two mining regimes is telling in its effects.

The average per capita income in South Africa was higher than that of Chile until 1990. This is roughly when both countries began reforms and moves towards democracy – South Africa away from apartheid and Chile away from the military rule of Augusto Pinochet. In 1990, per capita incomes in South Africa and Chile were roughly similar – about US$6 000 per person measured in constant 2010 US dollars.

Since then, Chile’s per capita income has rocketed. In 2016 it was over US$15 000 per person. Conversely, South Africa’s per capita incomes have essentially stagnated – measuring only US$7 500 in 2016.

South Africans are also now poorer than they were two or three years ago, with per capita incomes slowly declining. By contrast, the average Chilean is now twice as rich as the average South African, despite the two populations having had similar average income levels less than 30 years ago.

Chile’s economic growth and rise in incomes is largely thanks to mining (accounting for 50% of foreign revenue), which has been a major contributor to its increasing wealth.

Chile has shown that mining can be a tool to make a country and its citizens richer.

In South Africa, creating an environment which makes it easier for investors to put their money into mining will do far more for empowerment and transformation than current rules imposing onerous social and race-based burdens on mining ventures.

A mining industry supported by good, sensible policies will act as a tailwind for the economy, making everyone better off and delivering increased tax revenue to the government.

Chile is not perfect – it suffers from an over-reliance on mining to some degree – but sensible free-market policies on the economy in general and mining in particular have seen the country boom since the end of the Cold War. This has made all its citizens better off. South Africa would do well to look across the Atlantic to Santiago to see what we can and should be doing better.

*Sara Gon, a policy fellow at the SA Institute of Race Relations (IRR), a liberal think tank that promotes political and economic freedom. 

Read the article on Polity.com here.