Frei Chileanizes Chile's Copper Industry

Date 1964-1970

By taking partial control of Chile’s copper industry, President Eduardo Frei Montalva hoped to derive the benefit from the country’s primary export without seizing the industry outright. His action proved a precursor to such an outright seizure, however, when President Salvador Allende nationalized the industry in the 1970’s.

Locale Chile

Key Figures

• Eduardo Frei Montalva (1911-1982), president of Chile, 1964-1970
• Salvador Allende (1908-1973), president of Chile, 1970-1973
• Jorge Alessandri (1896-1986), president of Chile, 1958-1964

Summary of Event

In 1964, Chilean presidential candidate Eduardo Frei Montalva announced a plan to “Chileanize” the country’s copper mines. His opponent, Salvador Allende, advocated outright nationalization of the mines. Chileanization involved the government’s acquisition of part ownership and increased control of foreign copper holdings, an expansion program, and greater participation in production and marketing. By contrast, Allende advocated complete government ownership. Frei recognized that additional governmental control, in any form, over the copper industry would play well with Chileans, who had long resented unwarranted foreign influence on their economy. That either candidate wanted to gain power over the country’s copper industry was not surprising. Copper had been Chile’s economic mainstay since the mid-1800’s; its importance to the country was significant. In many Chileans’ eyes, foreigners, particularly Americans, had been exploiting them. They wanted desperately to take control of their lucrative and indispensable copper industry. Frei promised to give them what they wanted.

Chile was the third largest copper producer in the world, trailing only the United States and the Soviet Union. Before the mid-1970’s, copper accounted for 70 to 80 percent of Chile’s exports. Such heavy reliance on one product affected the country’s economy dramatically, particularly since the international price of copper was prone to sudden large changes.

Chile’s reliance on copper began in the nineteenth century, when British investments prompted large-scale development. American copper companies bought and developed the country’s major mines in the early 1900’s. By the 1960’s, three American companies—Kennecott, which operated through a subsidiary named the Braden Copper Company, Anaconda, and the Cerro Corporation—controlled roughly 85 percent of Chilean copper production. The companies operated comfortably in the Chilean environment, although the government extracted increasingly large sums of money from them.

Until the 1960’s, American mining companies paid no royalties to the Chilean government. They did, however, pay the highest mining taxes in the world, ranging from 67 percent of gross taxable income to 83 percent. Between the early 1940’s and the mid-1960’s, these rates more than doubled, from a base rate of 33 percent. The mines paid into the Chilean treasury every year more than all other taxpayers in the country combined. Still, the companies made healthy profits. Kennecott derived 25 percent of its total world copper production from the country; Anaconda’s share came to 65 percent. These statistics explain to some extent why Chileans resented foreign involvement in the copper mining industry.

Chileans’ primary objection was the extremely limited voice they had in the extraction of Chile’s most valuable natural resource. The country’s government received funds via taxes for investment in other sectors of the economy, but Chileans had little to say regarding development or management. This was a long-standing sore point, especially as copper’s importance to the country’s economy grew after World War I, when American companies began large-scale development and introduced new technologies that made it feasible to extract copper from lower-grade ores.

Typically, Chilean copper ores are of relatively high grade, making extraction of copper less costly. New technology reduced the cost of extracting lower-grade ore and led to the expansion of refining facilities. By 1925, Chile’s retained share of the value of copper output was about one-quarter. That grew to more than four-fifths in 1970, primarily as a result of higher taxes. The growth in income from copper, however, was misleading.

The involvement of American companies in the copper industry did little to aid Chile’s economy during the mid-twentieth century. Problems began during the worldwide Depression of the 1930’s, which wreaked havoc in Chile. In 1930 alone, Chile’s gross domestic product (GDP) dropped by 14 percent, mining declined 27 percent, and export earnings fell 28 percent. By 1932, the GDP was less than half of what it had been in 1929. The economic decline prompted Chilean national leaders to pursue economic growth through greater government intervention in the economy. One goal was to increase domestic production of goods such as steel and petroleum products in order to reduce the country’s reliance on imports of such goods.

Attempts at industrialization failed to produce the hoped for dynamic growth. For three decades after the onset of the Depression, spiraling inflation and continuing slow economic growth affected Chile. Administration after administration failed to stimulate serious economic growth. Production from the large copper mines nearly stagnated in the first half of the 1960’s. For example, ore production was 438,000 tons in 1950. It grew slowly to only 532,000 tons in 1960, a time when copper provided roughly two-thirds of Chile’s foreign exchange and up to 70 percent of its revenue. By contrast, production jumped to 692,000 tons by 1970, after Frei came into office in 1964, and exceeded 1 million tons by 1976.

That Frei attained the presidency was no mistake. Chileans elected him for several reasons. For example, unlike previous leaders, he had a solid, practical economic reform plan in which Chileans could place their faith. Frei also evinced interest in Chileans of every class, not solely the wealthy. During the election campaign, he sent teams of his supporters to the slums, factories, and farms to organize voters and solicit votes. On election day, he even supplied baby-sitters to make it easier for mothers to vote. Frei knew how to attract votes. What excited the people of Chile, though, was his pledge of economic reforms. One of them was to Chileanize the copper industry, an alternative to outright nationalization that appeased Chilean nationalists.

The nationalists advocated the outright usurpation of the copper industry. Many Chileans believed that foreigners, no matter how much they paid in taxes, were simply exploiting resources that belonged to Chileans. This feeling had grown stronger after World War II, particularly as far as the United States was concerned. Many Chilean government leaders and businesspeople fostered an awareness of the disadvantages of subordinating the country’s copper, and thus indirectly its industrialization policies, to changes in the economy of the United States. Members of Chile’s political left and right did not agree on much, but they did agree that there was a disparity between what copper exports might bring the nation and what they actually provided. They took their frustration out on the copper companies, albeit somewhat timidly.

One of the steps the government took was to implement the “Nuevo Trato,” or New Deal, in 1955. It aimed at attracting further investment through profit stimulus. The plan reduced the major copper producers’ effective tax rates and provided them with many commercial, accounting, and exchange control benefits. It failed, however, to attract an increase in investment from the companies.

As part of the Nuevo Trato, the government founded a Copper Department. Eventually, this department provided the government with badly needed technical capabilities that allowed it to monitor the copper industry. That was small consolation at a time when Chile’s share of the world copper market was threatened. Despite the program’s failure, some Chilean politicians, primarily members of the newly established Christian Democratic Party, founded in 1957 and led by Frei, promised to increase the government’s control of the copper market. By the time he assumed the presidency, Frei had a clear plan of how to deal with the copper companies.

Frei intended to implement a program called “Revolution in Liberty,” under which the government would alter dramatically the foundation of the country’s society. Frei planned to redistribute income and wealth, improve the country’s standard of living, and broaden opportunities for Chilean workers and peasants. Finally, he wanted to democratize the country’s political and social life. Frei’s plan was ambitious. At the center of his program lay negotiations with the copper companies, through which he hoped to take at least partial control of the industry.

Frei had some leverage in extracting concessions from the companies. Industry executives had seen the handwriting on the wall during the presidency of Jorge Alessandri, who had come into office in 1958. During his tenure, taxes on the copper industry increased by 10-15 percent, and a Conservative minister had proposed a plan whereby the companies would be forced to raise production considerably. Concomitantly, the amount of copper to be refined in Chile would rise as much as 90 percent. As a result of reshuffling in the cabinet and negotiations between the government and the companies, the plan did not become reality. It did, however, put the copper companies on notice that changes were imminent.

Frei took advantage of the companies’ fear of nationalization, the growing feeling of nationalism in Chile, and the memory of Alessandri’s overtures aimed at extracting greater benefits from the country’s copper industry to promote a form of government ownership of the mining activities. He was well aware of the importance of foreign investment in Chile. The money invested brought with it high technology and complementary capital-intensive production, neither of which aided the government’s efforts to create jobs. Through the 1960’s, industry in general in Chile provided an average of only about fifteen thousand job opportunities per year. That was nowhere near the number needed to absorb the ever-increasing flood of migrants moving from rural to urban areas.

Chile’s accumulated international obligations in 1964, which exceeded $1 billion, required almost 40 percent of copper export earnings for payments. Many Chileans believed that if the government nationalized the copper industry, it could retain more of the earnings and improve the country’s financial picture. Frei agreed, to a certain extent. He realized that Chile could not simply expel the copper companies. Doing so would have devastating ramifications for the country’s economy. He pushed for Chileanization instead of nationalization as one step in his reform platform. His government introduced extensive reforms, primarily in the country’s outmoded agrarian sector, improved the tax system and government efficiency, and increased expenditures for education, health, and housing. Most important, his administration concluded a major new agreement with the American-owned copper companies that involved substantial new investments in copper production.

As soon as he assumed office, Frei concentrated on concluding the prolonged and difficult negotiations that he had begun with the copper companies prior to the election. The companies were willing to meet him halfway. The companies realized that their position was untenable. The days when individual corporations could exploit countries had long since passed. Thus, they negotiated in good faith with the Frei government, despite some unexpected and embarrassing occurrences not of their own making.

One of the biggest complications occurred in January, 1966, when workers at Kennecott’s El Teniente mine went on strike despite the fact that they were the highest paid laborers in the country. They justified the strike on the basis that inflation had caused a 25.9 percent increase in the cost of living in Chile during 1965. Their strike was legal. Laborers at Anaconda mines, however, went on a series of wildcat strikes that resulted in a number of them losing their lives. According to Frei, not only did these strikes embarrass the government, but they also cost the country $57 million. These were only temporary setbacks.

Significance

Eventually, Frei and the companies hammered out an agreement whereby the government took over 51 percent of Kennecott’s operation (for which it paid $80 million, although its book value was only $67 million), 25 percent of Cerro, 25 percent of one Anaconda subsidiary, and 49 percent of an important exploration company, with payments to the company to be spread out over twenty years. The three companies pledged to invest about $430 million to underwrite an immediate five-year expansion program to assist development, in cooperation with the Chilean government. Of the $430 million, $200 million came from Kennecott, $150 million from Anaconda, and $80 millon from Cerro. In return, the government pledged to reduce the companies’ taxes, guaranteed it would not expropriate them, and agreed that Braden and Anaconda would continue to manage their investments inside Chile. Moreover, the companies would still sell all the copper produced through the parent companies’ sales subsidiaries, as they had done before Chileanization. Finally, the companies would continue to make decisions on operations, accounting, administration, and geological surveys. The arrangement satisfied both sides.

Completion of the agreement was timely. The Christian Democrats attracted financial help from multinational corporations at a time when Chile needed a financial boost, received added say in the companies’ operations, and acquired the right to purchase majority shares in current mines and major shares in future mines. The agreement also allowed Chileans to take advantage of the companies’ technology and expertise. The companies lost significant control over copper production but were still able to make a profit in their operations. Frei’s foresight in negotiating before being elected allowed him to propose the immediate purchase of copper stock for the state copper company. Consequently, after only a year’s debate, the Chilean Congress enacted his proposal in 1966.

Part of the reason the Congress adopted Frei’s plan had to do with world conditions at the time. Copper prices had risen dramatically during the 1960’s as a result of the Vietnam War. Production had not increased significantly. Copper output between 1964 and 1970 rose only 10 percent, as opposed to the targeted increase of 90 percent. These figures had a dramatic effect on the Chilean economy, since copper still accounted for 70-80 percent of the country’s exports, making the economy highly sensitive to small changes in the international price of the product. Thus, the Chilean Congress considered the time right to take over the copper industry.

The government derived immediate benefits from the Chileanization process. It acquired part ownership in the large mines in the late 1960’s, including 51 percent of El Teniente, the world’s largest underground copper mine. Taxes on the large mines were adjusted in 1967. That same year, the government created the State Copper Corporation (Corporacion del Cobre, or CODELCO) to supervise the large mines and the marketing of copper. Two years later, the government imposed a windfall profits tax, which was triggered whenever the world price for copper exceeded a specified level. By 1970, Chile was obtaining 83 percent of the earnings of the large mines as well as participating to some degree in planning and operations. That was not enough for incoming president Salvador Allende.

Allende recognized that Chileanization did not give the government complete control of the country’s copper industry. For example, he was upset by the fact that Kennecott and Anaconda continued to manage their investments inside Chile and sell all the copper they produced through their own sales subsidiaries. Thus, he took Chileanization the final step: Allende’s government took complete control of the copper industry through nationalization. That was the final step in the country’s long battle to seize its most valuable asset, copper. It was Frei, however, who built the foundation for the final takeover, a step for which he will long be remembered in Chilean history.

Bibliography

Falcoff, Mark. Modern Chile, 1970-1989: A Critical History. New Brunswick, N.J.: Transaction, 1989. Provides an in-depth look at Chile’s history in the post-Frei years. The author devotes chapter 6 to copper’s role in Chilean history. The book is replete with footnotes and asides that highlight the importance of copper and how various Chilean presidents approached nationalization.

Gunther, John. Inside South America. New York: Harper & Row, 1967. A lengthy overview of South America in general on a country-by-country basis. Includes a keen insight into the importance of copper in Chile’s history.

Hersh, Seymour M. The Price of Power: Kissinger in the Nixon White House. New York: Summit Books, 1983. Describes the American government’s attempts to influence politics in Chile and focuses in particular on President Richard M. Nixon’s dislike of Frei. Presents a concise analysis of the results of Frei’s Chileanization plan.

Loveman, Brian. Chile: The Legacy of Hispanic Capitalism. 3d ed. New York: Oxford University Press, 2001. A complete history of Chile dating back to the time of the Spanish conquest. Devotes considerable space to Frei’s role in the country’s history and to copper’s influence.

Merrill, Andrea T., ed. Chile: A Country Study. Washington, D.C.: Government Printing Office, 1982. A collection of essays portraying the history, sociology, economy, political structure, and national security of Chile. Replete with tables supplementing the essays. An excellent overview of Chile.